Stocks are flat today (S&P -.17, Dow +1.51) as are bonds (10yr Note +6 bps, FNMA 30yr 4% coupon +9bps) as markets prepare for the Bureau of Labor Statistics (BLS) jobs report tomorrow. Consensus estimates call for +188k non-farm jobs to be added to the economy in April, but that number could be meaningfully higher. If so bonds would sell and rates would rise. [UPDATE 4pm ET: FNMA 4% down 22bps, validating this week’s market view]
You wouldn’t necessarily deduce a higher-than-expected jobs report from today’s weekly jobless claims data showing 6000 fewer jobless benefit claims last week and the four-week average rosing 3250. In addition to a stronger ADP jobs growth number, our higher jobs outlook is predicated on the BLS model that counts jobs using Birth/Death ratio, which measures net gain or loss of openings (births) and closings (deaths) of businesses.
The BLS counts how many businesses opened and closed by monitoring creation and cancellation of employer tax ID numbers (like a social security number for a business). That data reveals what sector an employer is in, then the BLS calculates average number of employees for that sector, and does their job count by the net gain (birth) or loss (death) of businesses.
When a business is ramping up or winding down, hiring or firing decisions take many months, so this data is on a big lag. But tomorrow’s March figures should finally start to show that a net gain in the Birth/Death ratio because the economy has been improving, state income tax receipts are rising, and unemployment claims have improved.
Again, if this theory is true and the BLS number beats estimates of 188k, bonds would tend to net sell, and rates rise when bond prices drop in a selloff.
Another employment input from today’s Chicago PMI report on manufacturing activity further supports the improving jobs picture: it showed hiring for factories in that region grew to it’s second highest level since 1973.
Chicago PMI also showed factory order backlogs reached the highest level since 1974, and that the multi-month trend of manufacturers paying higher prices to do business continues. This is the latest in an ongoing manufacturing inflation trend, which is further downside pressure for bonds (and upside pressure for rates).