Employment Data Falls Below Expectations, Signals Further Rate Hike Uncertainty

The highly anticipated August employment report displayed a less robust growth rate in the labor market as the nonfarm payrolls, unemployment, and average hourly earnings figures all came in below expectations.  With the average estimate at 180k, the actual figure was 151k last month, while July’s original reported value was revised up 20k to 275k.  While certainly not strong enough to definitively warrant a rate hike at the September FOMC meeting, the August report still showed significant strength in the labor market.  The unemployment rate similarly missed the consensus by a small margin, remaining unchanged from the previous month at 4.9% where a 0.1% decrease was expected. Change in average hourly earnings was also soft, up 0.1% in the month and +2.4% YoY.  The less than spectacular employment data initially prompted a rally in bonds, but reversed soon thereafter, as investors continue to waiver over the possibility of one or two rate hikes in 2016.  In addition to the labor metrics, the international trade deficit was reported at a lower-than-expected $39.5 billion, as exports in agricultural goods jumped.                  

Oil halted the trend of four straight days of declining prices, following comments from Vladimir Putin related to a supply freeze.  In an interview with Bloomberg News, Putin expressed his desire for Russia and OPEC, producers of half the world’s oil, to reach an agreement that would limit production and stabilize energy prices.  He reinforced the message that Russia is ready to partake in informal discussions with OPEC later this month in hopes to revive the arrangement that was nearly enacted this past April, but fell apart at the last minute due to complications over Iran’s future production.

The U.S. data reports coupled with rising energy prices pushed European stock markets up for the day.  The main indexes saw a near 2% jump for the day despite the absence of any major European earnings or data releases.  In the rates derivatives space, London was officially unseated by the United States as the global center for OTC interest-rate derivatives trading for the first time ever.  According to a report released by the Bank for International Settlements, 41% of interest-rate derivatives were reported as traded in the U.S. compared to 39% in the U.K.  The BIS attributed the change to an increase in dollar-denominated swaps which now trade more than $1.4 trillion per day, more than double that of euro-denominated products.
       
All three major U.S. stock indexes currently are up roughly 0.4%, while Treasury yields and swap rates are up 1-2 bps in the front-end and 3-5 bps in the long-end.  Crude oil prices have rebounded up 3%, putting WTI crude at $44.50 per barrel and Brent crude at $46.90 per barrel.