Prior Week Summary
A disappointing jobs report took the rates markets lower in yield, as the five-year maturity Treasury note fell roughly nine basis points and ten-year notes fell six basis points on a week-over-week basis. The Labor Department reported on Friday that the economy added 160,000 workers in the month of April, meaningfully below the 200,000 that were expected prior to the release. The unemployment rate remained unchanged at 5%, hovering just above the 4.9% cycle low reached in the first quarter. Despite the relatively weak headline print, the labor markets continue to be seen as a bright spot in the economy. Within the same report, the Labor Department reported that average hourly earnings continue to increase, gaining 0.3% in April, bringing the year-over-year increase in hourly earnings to 2.5%. The same report detailed that the average work week expanded marginally to 34.5 hours in April from 34.4 in March. The labor force participation rate fell back to 62.8% after a six month trend of increases in the metric.
As we go to print this morning, the implication of the relatively week headline jobs number seems to be that the market now sees the probability of another rate hike in 2016 to be below 50%, as the next hike is now priced in for the second quarter of 2017. Immediately following the report on Friday, the 2-year Treasury note traded as low as 68 basis points in yield intraday, providing a fairly strong indication as to where traders expect front-end yields to be over the course of the next two-years, relative to the current 50 basis point upper bound on the Fed Funds target range.
The Look Forward
This week’s data calendar is busy with top tier data releases starting with retail sales, producer prices, and consumer sentiment. The Treasury is scheduled to auction $24b in 3-yr notes, $23b in 5-yr notes, and $15b in 30-yr bonds. Additionally, the Fed’s Evans, Kashkari, Mester, George, and Williams all have speaking engagements on the state of the economy.