March Employment Numbers Disappoint, Bonds Rally

We learned on Friday that the U.S. added 126k jobs during March, which was the lowest gain since December 2013 and more than 100k below expectations. The unemployment rate held steady at 5.5%. The weak March number coupled with downward revisions to January and February, brought the three-month moving average of monthly gains to 197k, down from 324k in the fourth quarter of 2014. Underlying the report was weakness in average weekly hours worked, which fell to 34.5 from 34.6, and a drop in the participation rate to 62.7% from 62.8%. One bright spot was a 0.3% month/month gain in average hourly earnings, but this series has proven volatile in the past, and year/year gains remain stuck around +2% (+2.1% in March). This release is the latest in a series of disappointing domestic economic data over the past few months. The Citigroup Economic Surprise Index, which measures economic data prints relative to expectations, has fallen to (62.5) from a 3-month moving average of (28.1).

As Chris Low of FTN Financial put it on Friday, “Until today, the prevailing economic story was: Sharp Slowdown in Q1, but the Job Market Seems Immune. As of today, it is: Sharp Slowdown in Q1 Spills into Jobs Report.”  The Federal Reserve will certainly take note of this report as they make their next monetary policy move. Coming into this year, we felt that any rate increase would be a late 2015 or even a 2016 event. The market is beginning to agree with us as Fed Funds Futures are now pricing in the first rate hike to come in December (versus September prior to the jobs report).

Sources: Bloomberg, Citigroup, FTN Financial