Do We Believe the BLS?

It was another rough week for mortgage rates. The 10-Year Treasury yields hit highs that haven’t been seen since 2002. This is despite some rate-friendly economic news. Virtually all of the recent increases came after the August Bureau of Labor Statistics (BLS) Jobs report on September 4th. If you remember, the BLS announced a massive amount of job creations at 162,000 while markets only expected 56,000. This gave fuel to the Federal Reserve (Fed) rate hike chorus pushing for more hikes this year. This has caused a painful spike in interest rates over the past month.

BLS Jobs Report Shows Weakness

Based on Friday’s BLS report for September, it appears this was another case of the BLS publishing a market-moving report only to revise numbers downward. The BLS revises its reporting over the 2 subsequent months. This month, we saw them revise the prior two months down by 60,000. July had its final revision to a loss of 10,000 jobs for the month, and the huge August report was revised for the first time down to 133,000. The BLS’s own Quarterly Census of Employment and Wages (QCEW) has repeatedly shown massive negative revisions. As we have seen, markets rarely move on corrected data. They move on to the initial announcements. Would September have been such a rough month for rates had the BLS been more accurate with their initial reporting?

The September jobs report follows 5 months of poor jobs numbers, like July’s negative print, excluding August’s oddity. The report showed 29,000 job creations, well below estimates of 90,000. The birth/death model that we have extensively discussed reduced 190,000 jobs, a sharp reversal from August’s 74,000 job addition.

The Household Survey, from which we derive the unemployment rate, showed it increased from 4.1% to 4.2%. The job creation component showed a healthy job creation of 406,000, but it also showed the labor force increased by 485,000. A bit of weakness, though, was that full-time employment only increased by 88,000 while part-time grew by 205,000.

Average hourly earnings rose 3.0% over the year. This is still below the 3.4% CPI inflation rate. This means that Real Wages remain negative and don’t keep up with inflation. Long-term unemployment was shown to affect 1.9 million people. That is 27.1% of all unemployed people, a high number. This was a very weak report.

PCE Inflation Comes In Cooler

The Fed’s favorite inflation report, Personal Consumption Expenditures (PCE), was released this week for August. This was an important release as it is the first time the figures were finally adjusted to account for the incorrect measurement of Portfolio Management that we have discussed extensively. The adjustments that they made resulted in a 0.3% downward revision to both headline and core.

Headline inflation rose 0.3% in August, one tenth beneath estimates. Core PCE, stripping out volatile food and energy prices, rose only 0.2%, also one tenth less than the 0.3% expected. Year over year, headline PCE came in at 3.4% and Core PCE at 3.0%, with Core well below the 3.3% markets were looking for.

Here is the important part. July’s Core reading was originally reported at 3.3%. After the methodology correction, July was restated to 3.0%, and August was then held at that same 3.0% level while markets were expecting the 3.3%. So, the annual rate didn’t fall during August — it was already lower than we thought. Simply measuring Portfolio Management correctly moved Core PCE three tenths closer to the Fed’s 2% target, without a single price changing. That is a meaningful chunk of the inflation the Fed has been hiking rates to fight.

Interestingly, the savings rate fell from 4.6% to 4.1%, the lowest level in 4 years, showing that consumers are under stress, still spending, and not saving.

Q2 GDP Beats Expectations

Gross Domestic Product (GDP) for Quarter 2 (Q2) had its final reading released. It showed a strong 2.2% (annualized) and above estimates at 1.5%. Much of this strength came from consumer spending and business investment, mostly from AI.

ADP Payrolls Top Forecasts

ADP released its private payroll Employment Report for September. This was stronger than its August report, basically the opposite of the BLS. While the BLS includes government jobs, unlike ADP, government jobs didn’t account for the disparity between the two reports last month or this month. ADP showed 90,000 jobs were created, while 70,000 were expected. August was revised lower from 38,000 to 36,000, which was weak and a big difference from the BLS’s original 162,000. Most of the gains in ADP came from Education/Health Services, which contributed 55,000, and Leisure and Hospitality, which contributed 22,000.

Fed Hike Odds Move Lower

These reports, coupled with some much more Dovish (no rate hike) Fed speakers, have caused the likelihood of a Fed hike this month to go down. There is a strong possibility of one additional hike in December, but that will depend on continued inflation and job reporting in the next 2 months.

Rates Ignore Favorable Data

The reports this week were exactly what rate markets have been asking for: weak jobs, cooler inflation, falling oil, and the October hike coming off the table. Rates barely budged. When bonds won’t rally on good news, it usually means the problem isn’t the data — it is the supply of debt and the global picture. We may be building a floor here, but the improvement simply did not materialize.

Next Week: Light Economic Calendar

Next week is a quiet economic news week after this week’s big reports:

• Wednesday, October 7: Fed Minutes, 10-Year Note Auction
• Thursday, October 8: Jobless Claims, 30-Year Bond Auction