The disappointing March employment number announced last Friday adds to the uncertainty surrounding the economy, the Fed and the markets.
The change in non-farm payrolls was 126,000 in March, versus an expected 245,000. Adding to the weakness was the two-month downward revision of 69,000 jobs. However, the economic release wasn't all negative, with the unemployment rate holding steady at 5.5% and average hourly earnings up 0.3%. Historically, the employment number is volatile even when growth is strong, and given that we have had a string of strong numbers for a few months in a row, it is not a surprise the number is now soft.
The market has discounted the strong employment to offset other economic indicators showing weakness in recent months as a result of the strong dollar and weather-related concerns. The Fed had indicated a few weeks ago that employment had room to improve, an analysis confirmed by this report.
Despite the stock market being closed on Friday, the initial reaction to the employment number has been an approximately 1% decline in equity futures and a five to ten basis point drop in bond yields. Many markets are still range-bound for the year, but the employment report does add to pressure for a break out of the range on the downside for the stock market and bond yields. A close below 1980 on the S&P 500 Index would be a negative technical indicator for the equity market, with downside potential to 1850. The 1.86% level (October 15th intraday low) on 10-year bonds has been a key technical level on the 10 year Treasury, and we broke back below that level after the report. The January low yield for 10 year Treasury bonds should serve as solid support at 1.64%. A break below this level would most likely require weaker economic data and significant softness in equity prices.
This week should be an interesting one for the market, as Wednesday's release of the minutes from the March 17 to 18 Federal Open Market Committee (FOMC) meeting, upcoming first-quarter earnings, and economic data will all be examined closely.
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