Monthly Jobs Report and the Bond Market

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One of the most important recurring events for the bond market occurs at 8:30 Eastern time on the first Friday of every month, when the U.S. Labor Department reports the key employment data for the previous monthly period. Included in the report is information related to all aspects of the job market, including the unemployment rate, the absolute number of jobs added or lost, total hours worked, average hourly wages, and how the jobs picture for various sectors has fared (such as governments, restaurants, manufacturing, etc.).

Of all the economic reports released each month, the jobs report has the largest impact on the bond market.

The reason the employment report is so important is that the job market it is the heartbeat of the economy. It is both an indicator of economic health – since a strong economy prompts companies to hire more workers – and an engine of growth, since higher employment means more dollars available to be spent on goods and services. Without job growth, overall economic growth is likely to be limited no matter what else is happening in other areas of the economy.

Impact of a Positive Jobs Report

Since jobs are so important to the economic outlook, investors take a positive report as a sign that growth is on track. This tends to depress bond prices for two reasons.

First, it makes the Federal Reserve more likely to raise interest rates in the future. Since the fed funds rate heavily influences yields on short-term bonds, the prospect of the Fed raising rates causes yields to rise and prices to fall for Treasuries and other rate-sensitive segments of the market such as municipal bonds, mortgage-backed securities, and higher-quality corporate bonds.

Second, stronger growth raises the likelihood of inflation. Since higher inflation eats away at bond prices, the prospect of rising price pressures is typically negative for bonds. While the connection between growth and inflation is tenuous and uneven in reality, in this case, it’s the perception that counts.

Impact of a Negative Jobs Report

A weaker jobs report tends to be positive for the bond market for the opposite reasons of those just mentioned. It makes the Fed more likely to cut rates than to increase them, and it reduces the odds of inflation. Both are positive for the performance of U.S. Treasuries and other rate-sensitive investments.

It’s All Relative

A key aspect of the report is not just how many jobs or added or lost, but how the result compares to market expectations. A jobs report that shows 50,000 jobs added in a particular month may not indicate that the economy is roaring, but if expectations were for negative growth, the market typically reacts to the surprise, not the absolute number.

While it’s hard to tell by watching the markets’ reaction to each report, the jobs number is notoriously volatile on a month-to-month basis. A single report isn’t an indicator of the economy; in fact, most economists look at the trailing three-month average at a minimum, and often they will gauge growth using 12- to 24-month trends. For the markets, however, the short-term impact is what’s important.

What Should You Do With This Information?

This discussion isn’t intended as advice on how to trade bonds prior to a jobs report, since that type of activity is the province of only the most sophisticated intuitional investors.

Instead, it provides some insight as to why the jobs report receives so much attention, and why the government bond market tends to be so volatile on the first Friday of the month when the report is released.

To learn more on this subject, take a few minutes and tune into CNBC on the morning of the next jobs report. The accompanying commentary will provide excellent insight regarding the jobs report’s impact on the financial markets.