Traders React After Jobs Report Pushes Out Rate Cut Possibility

The Bureau of Labor Statistics released the agency's employment-focused survey results for the month of January on Wednesday morning, after a delay of five days due to the government shutdown. 

The results surprised to the positive, despite a number of rather dour-looking labor market based data points that have crossed our tape of late. 

I am utterly surprised by the strength in a number of metrics published on Wednesday morning. While the report is not overtly robust in nature, the results were far better than expected. The question some readers might be asking is this: Do I owe Cleveland Federal Reserve Presisdent Beth Hammack an apology? The answer is simple: Yes, I do. 

On Wednesday morning, I went hard on her for her cautious opinion on short-term rates. I wrote, "If January payrolls kick some tail this morning, I'll apologize. If they don't, she should... to all of you." 

Well, this report does not exactly kick tail, but it is very good. I do not think that this report erases the negativity visible in those other reports, especially the ADP Employment Report for January (which was downright lousy) last week. I would also point out that the BLS is not known for its accuracy in reporting. This could all change in a few weeks.

None of that, however, gets me off the hook. So, to the president of the Cleveland Fed: Not because I agree, or because anyone has pressured me to do so, but because I was overly aggressive in my rant, as promised, I apologize.

Job Creation

Non-farm payrolls, which will very likely be revised in coming months, printed at an increase of 130,000 positions, well above expectations for about 70,000. There were downward revisions made to the prior two months of 17,000, leaving the number at a net 113,000. That came from the household survey (table A). Interestingly, the Employment Survey was even stronger, showing an increase of 528,000 employed persons for the month and a decrease of 141,000 persons.

Isn't that just out of left field? It gets even crazier. While one survey showed a net 113,000 new jobs created in January and the other survey showed 528,000 new hires, it all contrasts sharply with what ADP told us last week. The BLS Household result showed 172,000 private sector hires and a loss of 42,000 government jobs. The ADP Report, which only covers the private sector, showed only 22,000 private sector hires across the nation for the month of January.

So, how many folks found jobs in January? Was it 528,000? Was it a net 113,000? Was it 22,000 private sector (plus a negative number for government hires)? See what I mean? Spin the wheel? Nobody loses. Just have an idea. Don't bother with accuracy. Support the numbers that support that narrative. Easy peasy.

Key Data 

The unemployment rate, which is drawn from the household survey, moved lower in January from 4.4% in November, to 4.3% despite the fact that participation increased. That does add to the strength behind this release. Participation improved from 62.4% in December to 62.5% in January. Still drawing from the household survey, the employment-to-population ratio similarly improved from 59.7% to 59.8%. 

The number of individuals working part-time for economic reasons decreased by 453,000 persons in January while the number of individuals working part-time for non-economic reasons increased by 678,000 persons. That's 225,000 part-time hires with possibly 113,000 total net jobs created. Um, that's negative full-time job creation, Sarge. Yes, it is, Sparky. Nice catch. 

However, that does not really work well with the U-6 unemployment rate, which we commonly refer to as the "underemployment rate." This metric, which includes part-time workers that wish to work full time, dropped from 8.4% to an even 8%. That's a huge improvement for one month. If we use the 528,000 number for job creation, then full time job creation runs at 303,000. Maybe I owe Beth a full humbling. Gee whiz. 

The average workweek for full-timers, which is also a measure of labor market demand, printed at 34.3 hours, up from 34.2. This is still not all that strong. We like to see this number toggle back and forth between 34.4 and 34.5 hours, but the ball did move in the right direction.

Demographics

The unemployment rate along gender, ethnic background and education. Reminder: the rates are from November to December.

• Adult Men decreased from 3.9% to 3.8%
• Adult Women increased from 3.9% to 4.0%
• Teenagers decreased from 15.7% to 13.6%
• White decreased from 3.8% to 3.7%
• Black or African American decreased from 7.5% to 7.2%
• Asian increased from 3.6% to 4.1%
• Hispanic or Latino decreased from 4.9% to 4.7%
• High School Dropouts decreased from 5.6% to 5.2%
• High School Graduates increased sharply from 4.0% to 4.5%
• Some College/Associate Degrees decreased from 3.8% to 3.6%
• Bachelor's Degrees and more increased from 2.8% to 2.9%

Markets and Policy 

Here's the deal: This release makes it look as if the labor market is really starting to turn it around in a good way. That is a possibility. 

That said, I have a couple of "buts." Looking closely at industry-specific job creation, we see that healthcare and, to a lesser degree, construction, are providing almost all of the growth. Hospitality showed almost no growth at all, and hospitality does well when an economy is humming. Healthcare is a necessity. Restaurants, bars and hotels really are not. 

Markets are not taking these results well. Traders are selling U.S. treasuries on the probability that this pushed out any further interest rate cuts, at least on Jerome Powell's watch. This is also having a negative impact on equities. The stock market is reacting to the old "good news is bad" idiom as the need to price out any chance for reduced cuts in interest rates in March or April outweigh any boost that these numbers might provide to the real-time economy. 

That said, futures markets trading in Chicago are still pricing in a 59% probability for a 25 basis point reduction to be made to the federal funds rate in June. Yes, that's after Kevin Warsh takes over at the Federal Reserve.

At the time of publication, Guilfoyle had no positions in any securities mentioned.