Prior Week Summary
The U.S. economy added 151,000 new jobs last month, well below the amount of job gains that were estimated by economists prior to the report. The lower than forecast gain followed a downward revision of 30,000 jobs from the December report, reducing the initial estimate of 292,000 jobs to 262,000. Despite the relative weakness in labor markets implied by the headline figure, economists were quick to point out improvements in the labor force participation rate, ongoing growth in wages, and continued improvement in the length of the workweek. The Household Survey showed a 615,000 increase in employment, and a 113,000 decline in unemployment, which provided a positive benefit to the labor force participation rate, which increased by 0.1% to 62.7% – the third consecutive month of gains in the metric. The 4.9% unemployment rate is the lowest since February 2008, while the underemployment rate (U-6) rests slightly above cyclical lows.
The feedback loop of concerns relating to weakness in commodities, global growth, and incoming economic data in the U.S. has brought yields back to cyclical lows and market participants have all but erased any expectations for a rate hike in March. The Treasury market has enjoyed the strongest return to start a year since the credit crisis, with the broad Treasury market returning 2.6% year-to-date according to Bloomberg indices. The move in rates, which has brought the 5-year Treasury note below 1.2%, translates to a 56 basis point decline in yield since the beginning of the year. As of this writing, the Fed Funds futures markets imply a lower than 50% chance of any additional policy tightening prior to the end of 2016, a stark contrast to the 4 hikes that were forecast by the FOMC in their December dot plot.
The Look Forward
This week the market is likely to be focused on Fed chair Yellen’s semi-annual reports to the Senate Banking Committee and House Financial Services Committee, to see if her testimony provides any additional insight into how the Fed is looking at recent market volatility or clues about the evolution of their economic forecast. On the data front, the market is anticipating updated figures on retail sales, import prices, consumer sentiment, the labor markets, and wholesale inventories to be released throughout the week. The Treasury is also expected to auction $24B in 3-yr notes, $23B in 10-yr notes, and $15B in 30-year bonds over the course of the week.