Well, we were certainly wrong regarding the BLS employment report. As it is now widely known, June NFP increased by 195K, significantly above the consensus, and certainly much higher than our pessimistic outlook of a mere 125K. In addition, the May number was actually revised higher. The unemployment rate remained unchanged as the participation moved up 10bps from May, but remained 30bps below last year.
Construction, retail, business services, and leisure & hospitality jobs led the way, while government jobs along with jobs in manufacturing and transportation & warehousing showed weakness. The continuing increase in health care and social assistance jobs, more than offset the seasonal decline in education jobs. Leisure & hospitality jobs continued to increase significantly, driven mainly by seasonal factors, in our opinion.
Overall average working hours did not change; however, average hourly earnings jumped up 0.4%. We note that working hours have not changed for a while, but at the same time, earnings have gone up a bit. This could be one of the reasons why the Fed has begun to seriously consider tapering in Q4.
Some negative things did stand out. They include the U-6 unemployment rate which jumped 50bps to 14.3% for the first time since February. Some may claim that this is due to the higher participation rate, but then again, that rate increased merely 10bps. We also noticed the significant jump in number of people working part-time for economic reasons. While those that cited slack work or business conditions as reasons why they were part-time increased significantly, the ones that could only find part-time work declined. All of this appears to be somewhat of a mix of good and bad. Lastly, even though the participation rate moved up a bit, number of discouraged workers (of those not in the labor force) jumped to over one million, 200K+ above the May level and last year.
The equity market has responded nicely, up nearly 1%. But we note that the 10-year rate is now above 2.7%, up more than 20bps. These higher risk-free rate are pushing up the costs for equities, at least theoretically (CAPM). As rates continue to move higher, we think the QE premium will begin to be discounted. As usual, we think the fundamental value of the equity market is below the levels that we are seeing right now. We wish everyone a happy and safe 4th of July weekend.
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