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October Non-Farm Payrolls Came in Strong and Bonds Sold Off

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Strong October payrolls

In October, non-farm payrolls increased by 271,000, easily topping the Wall Street estimate of 185,000. The monthly ADP National Employment Report predicted the number would come in at 182,000. Investors should remember that ADP numbers are meant to forecast the final payroll number, not the advance number.

Private payrolls increased by 268,000, while government jobs rose by 3,000. Private services payrolls increased by 241,000, and manufacturing employment was flat. Construction jobs rose by 31,000 after rising by 12,000 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.

Professional and business services employment jumped from 33,000 to 78,000. The strong dollar has wreaked havoc on commodity prices, making things difficult for mining employment.

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Bonds sold off on the report. The ten-year yield rose from 2.2% to 2.3%. Strategists all over Wall Street changed their first interest rate hike forecast from 2016 back into 2015. Federal funds futures contracts increased their implied probability of a December rate hike to 71% from 53% the day before. Investors interested in making directional bets on interest rates can 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 big jump 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 factor 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 Corporation (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) or the iShares Home Construction ETF (ITB).

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