Why unemployment data moves bond yields

Labor market indicators

The Bureau of Labor Statistics released the Employment Situation report for September on Friday, October 3. This is one of the most closely watched indicators for the U.S. economy. An upbeat report can significantly drive stock (SPY) (DIA) (QQQ) markets higher. Upbeat economic data, however, usually drives up bond (BND) (TLT) yields. And this lowers bond prices.

The report estimated that the U.S. economy added about 248,000 jobs in the non-farm sector in September. The unemployment rate dropped to 5.9%, the lowest since July, 2008. Average hourly earnings for private sector employees declined marginally, from $24.54 in August to $24.53 in September. To learn more, read Investors’ stake in jobs and inflation numbers.

Manufacturing indicators

A number of manufacturing indices for September were released, covering both regional and national industrial sector activity. These included the manufacturing surveys conducted by the Federal Reserve Bank of Dallas and the Chicago purchasing managers index (or PMI). Although all showed that manufacturing activity expanded in August, the pace of growth varied across regions.

The nationwide Institute for Supply Management’s PMI showed strong growth in September, but at a slowing pace. Markit’s U.S. PMI, an alternative measure, also reported a slower pace of growth.

Housing market indicators

Housing market releases painted a negative picture. The pending home sales index fell 1% in August, as first-time homebuyers stayed away from purchases. The trend to rent rather than purchase a home, and the relatively higher mortgage rates in 2014, were two of the more compelling reasons why the index declined.

The Case-Shiller S&P 20-City Home Price Index, showed a month-over-month decline of 0.5% in July, the biggest decrease since November, 2011. Home price contraction is an important signal in the overall health of the housing market.

Construction spending also contracted by 0.8% month-over-month in August. Private and government construction both reported declines. The construction value chain has a multiplier effect on other sectors of the economy, and can significantly impact both stock and bond markets.

How did Treasury yields react to the employment and other economic data released last week? Read the next article to find out.

For more bond market trends and analysis, please visit Market Realist’s Fixed Income ETFs page.