Weak jobs report triggers strong market response

Despite a three-week delay in the release of the non-farm payrolls report, the market reacted strongly last week to a much lower than expected number. Non-farm payrolls increased by 148k in September versus the prior month’s increase of 193k and a forecast that called for an increase of 180k. Treasury prices rose as yields dropped about10 basis points on the week, signaling that the lower growth numbers are expected to prolong quantitative easing in the near term. Monthly job gains were spread across a number of sectors, with the biggest standout being construction, which added 20k jobs in September. While 22k government jobs were added during the month, this was 6k fewer than the last report and 52k fewer than May. This gain in the government sector will likely be reversed in October, as the effects of the government shutdown begin to take hold. Last week, the White House announced that it expects government jobs to decline by 120,000 as the result of the temporary closure of the federal government. One bright spot in the non-farm payrolls report was a 0.1% decline in the unemployment rate, from 7.3% to 7.2%. The decline came without any accompanying decline in the labor force participation rate, which stayed steady at 63.2%, indicating some credibility to the print. The next few months of economic data will continue to be skewed as the result of the shutdown. Bottom line, we may hit 6.5% unemployment with weak GDP growth, sub 200k monthly job creation and low labor force participation. This will leave the next Fed president with a difficult decision to make next year about tapering and the future of quantitative easing.