Today’s Lesson: Read Beneath The Headline

The eagerly awaited Nonfarm Payrolls report was released at 8:30 (EST) this morning, and it produced a collective gasp amidst traders. The headline number was an increase of 210,000 vs. a consensus estimate of 550,000. That is an enormous miss and appears to reflect significant weakness in the labor market. The knee-jerk reaction was a rally in both bonds and stocks, which reflected something we discussed yesterday:

Tomorrow’s report may prove to be a case where traders are actually hoping for bad news. A stronger than expected report would further kindle fears that the Fed would be more aggressive in tapering purchases and more able to raise rates sooner than hoped, while a weaker result could be perceived as allowing the Fed to extend monetary stimulus more than currently expected.

It is clear that both traders and news-reading algorithms were programmed to buy those assets if the headline number missed expectations. But a closer reading of today’s statistics was warranted. The unemployment rate plunged to 4.2% vs. a 4.5% estimate even as the labor force participation rate rose to 61.8% vs. a 61.7% expectation. The underemployment rate also dropped to 7.8% from a previous 8.3%. It could be a sign of labor slack if the unemployment rate fell because the labor force declined, but these appeared to be directly contradicting the nonfarm payroll report. Bonds quickly reversed their early gains, leading to higher yields across the curve, though stock futures continued higher into the 9:30 market open. That was their high for the day so far.

For those of you who may wonder why I assert that bond traders have a better read on the economy then their equity brethren, this is yet another example. Fixed income markets recognized that there was little in today’s report to dissuade the Federal Reserve from accelerating their taper while stock traders remained fixated on momentum and continuing yesterday’s buy-the-dip bounce. Bond traders were quicker to recognize the inherent strength in the bulk of the report.

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