NFP rise lacks participation yields amp USD back on the floor

The rally in bond yields and the US dollar proved as short-lived as the rapidity in which traders realized the decline in the employment participation from today’s release of the April jobs report. US April payrolls shot up by 288K (highest since January 2012), while the unemployment rate fell to 6.3% (fresh 5 1/2 year low). The upward revisions in NFP totaled +36k for February and March, but the plunge in unemployment was caused by an 806K decline from the labour force, reflected in the participation rate falling back to 62.8% from 63.2%.  Average hourly earnings slowed to 1.9% y/y from 2.1%.  As aggressive and broad was the jobs growth in non-farm payrolls across all sectors, reflecting a post-weather rebound, so was the sharp decline in the unemployment rate, a disconcerting sign of leavers from the labour force.

Bonds & FX not buying it

Focusing on the NFP figures first, bond traders showed that typical knee-jerk reaction by sending 10-year yields from 2.61% to 2.70% before falling back within the ensuing 30 minutes to 2.60%, followed by additional declines to 2.57%, the lowest since February. The realization that labor force participation posted its biggest monthly drop since October also contributed to the USD losing more than 90% of its earlier advances.

The drop back in bond yields and the USD was also driven by the escalation of events in the Ukraine-Russia situation following reports of Ukranian forces launching an offensive in the eastern separatist-held city of Slavyansk (city of Sloviansk) against pro-Russia militia fighters. The events led Russia is to call an extraordinary meeting at the UN Security Council, expected to be held at 17:00 ET (at the same time president Obama is meeting with Chancellor Merkel).

Fed away in May

As there is no FOMC meeting scheduled in May, bond traders will roam along on the wilderness of speculating on each and every US data item, only this time, the downside risks to bond yields will prevail. Traders haven’t forgotten Yellen’s stark sobering reminders about the job market requiring more stabilization and US economy needing “extraordinary support” for an extended period.

Diverging stocks & yields?

The last few days showed stocks diverging away from bond yields, a break of the usual convergence seen since spring 2013. The Yellen Fed is likely to exert extra efforts in talking down yields aimed at countering any expectations from bond bears anticipating a post-weather normalization in the data. The rising cost of debt to the Federal government will be closely considered by the central bank, especially as GDP risks not delivering +2.5% growth on the year.

Stocks will likely tiptoe into new record territory, shrugging the ugly May seasonals before much needed consolidation drives bond yields near the low 2.50s. The chart on the right illustrates the times of falling stocks when each of the Fed stimuli was ended (end of QE1, end of QE2, end of Operation Twist). Bond markets may have finally got the message that “tapering means no tightening” as bond yields cease from increasing, allowing stocks and the Fed’s balance sheet to sail in motion.