September payrolls disappoint
In September, non-farm payrolls increased by 142,000, missing the Wall Street estimate of 200,000. The monthly ADP National Employment Report predicted the number would come in at 200,000. Investors should remember that ADP numbers are meant to forecast the final payroll number, not the advance number. The St. Louis Fed recently put out a piece discussing street estimates for August payrolls and how they were usually revised upward. That didn’t happen this time around, as the August numbers were revised downward from 173,000 to 136,000.
Private payrolls increased by 118,000, while government jobs rose by 24,000. Private services payrolls increased by 131,000, and manufacturing employment fell by 13,000. Construction jobs rose by 8,000 after rising by 5,000 the previous month. Increasing construction employment bodes well for homebuilders. Health and social services employment continues to experience the largest growth, driven by aging Baby Boomers.
Overall, employment continues to increase for professional and business services. However, the growth rate is decelerating. The strong dollar has wreaked havoc on commodity prices, making things difficult for mining employment.
Bonds rallied on the report. The ten-year yield fell from 2.05% to 1.90% immediately after the report before profit-taking sent the yield to 1.99% at the close. The report certainly added clarity to why the Fed chose to stand pat at the September meeting, and Fed Funds futures decreased the probability of a December rate hike from 50% to 40% following the report. Investors interested in making directional bets on interest rates should look at the iShares Barclays 20+ Year Treasury Bond Fund (TLT).
Are builders adding inventory?
The first-time homebuyer is making a comeback. This is good news for builders such as PulteGroup (PHM) and D.R. Horton (DHI), which are big in entry-level housing. The growth in construction jobs may indicate that builders are beginning to add some inventory. However, we are heading into the seasonally slow period for builders, so any major plans will be more about 2016.
Luxury rentals continue to be a big growth story for Toll Brothers (TOL), although there seems to be a lot of foreign money piling into that sector, as it is a dollar play as well as a real estate play. We recently heard from Lennar (LEN) and KB Home (KBH), both of which reported good numbers. Investors interested in trading in the homebuilding sector as a whole can look at the S&P SPDR Homebuilder ETF (XHB).