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The Fed’s monthly job report is the most important monthly report

Given the Fed’s focus on unemployment, the monthly jobs report is by far the most important monthly economic report

The Fed has stated over and over that it will be guided by changes in the labor market when making monetary policy decisions. It also focuses on inflation, but the low level of inflation is giving the Fed the leeway it needs to target employment. The Fed has given guideposts about raising interest rates (unemployment of 6.5% and inflation below 2.5%), but it has been less granular with its thoughts about ending quantitative easing (QE). This makes the monthly employment situation report the most important data point bond that market watchers will focus on.

MR-unemploymentEnlarge Graph

The Bureau of Labor Statistics Employment Situation Report

The Bureau of Labor Statistics puts out its Employment Situation Report monthly. The report contains a tally of the jobs created, the number of people in the workforce, the length of the workweek, the number of people employed part-time who would rather be employed full-time, and finally a breakdown of the statistics among demographic data.

The individual statistics that will be released in the Employment Situation Report include:

  • Change in non-farm payrolls (the headline payroll number)
  • Two-month payroll revision
  • Change in private payrolls
  • Change in manufacturing payrolls
  • Average weekly earnings
  • Average weekly hours
  • Change in household employment
  • Unemployment rate
  • Underemployment rate

Of these statistics, those that will matter most are the headline payroll number and the unemployment rate.

What to watch for 

With the payroll data, the private number will matter as well as the public number. The public number involves government employees. The federal government has been adding employees, but the state and local governments have been shrinking their staff. If we get a particularly weak public sector number, the Fed will feel political pressure not to end QE until government payrolls stabilize. While the Fed is independent politically, Ben Bernanke (chairman of the Federal Reserve) and the Obama Administration have very similar views.

With the unemployment rate, the headline number will matter most, but the secondary number is the labor force participation rate. The labor force participation rate is important because it gives investors clues as to what the long-term unemployed are thinking. Essentially, a person who has been unemployed for over six months and has not actively sought out employment in the prior week is not considered part of the labor force and therefore does not count as unemployed. This essentially understates the unemployment rate, which means that the Fed will be looking at both the headline number and the labor force participation rate. A falling unemployment number does not necessarily indicate a labor market on the mend if the participation rate is falling in tandem.

Another statistic that’s worth watching is the average workweek. A declining trend in the average workweek would signal layoffs ahead. Conversely, an increase in average workweek would portend hiring in the future.

Implications for mortgage REITS

The mortgage REITs like Annaly (NLY), American Capital (AGNC), Hatteras (HTS), and Capstead (CMO) are vulnerable to increasing interest rates. If the job numbers are good and the bond market sells off, they will get hit, as they take mark-to-market losses. Servicers like Nationstar (NSM) and Ocwen (OCN) will actually benefit from increasing rates, as these rates positively affect the value of servicers’ portfolios of mortgage servicing rights.

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