US DATA PREVIEW: OCT JOBS SEEN RECOVERING AFTER SEP ABERRATION
By Marco Babic
economeister.com
WASHINGTON (MktNews) - Non-farm payrolls in the United States are seen posting a strong reversal from their weather-related decline of 8,000 in September as the sectors which were severely impacted by Hurricane Floyd are expected to stage a strong comeback.
Forecasts in a Market News International Survey of 19 economists yielded a median forecast of a 300,000 gain in non-farm payrolls for October within a range of up 180,000 to 425,000.
Whether all of the anticipated recovery in the payroll data will be evident in the October data is not yet clear. It may be the case that September is revised sharply higher and the October payroll figure posts a more modest gain, one reason some analysts suggest looking at more than one month of data.
"Some of the weakness in payrolls in September will probably be revised away -- if not, then the October increase should be even larger," said JP Morgan economist James O'Sullivan.
O'Sullivan said his forecast for a 275,000 payrolls gain in October assumes that the September result was due to Hurricane Floyd cutting payrolls by about 60,000 and "a tendency for September to be revised up, although not necessarily all at once."
Moreover, there appears to be an upward bias to the October statistics that may overstate gains, according to Donaldson Lufkin & Jenrette economist Marilyn Schaja.
Schaja noted there was a 4-week interval between survey weeks in October 1999 compared to 5-week intervals in October 1997 and 1998. While normally such a switch would cause employment to be lower, "we believe, however, the seasonal factors overcompensate for this shift," she said.
Assuming the 300,000 median as the actual result, the three-month average payroll gain would be 132,000 in contrast to a 227,000 average for the May-through-July period.
But such "underlying moderation" is the result of tight labor supply rather than demand, and with the unemployment rate at generational lows, "there simply are not enough available workers to fuel employment growth much in excess of the rate of growth in the working age population" of about 125,000 to 150,000 a month, according to Morgan Stanley Dean Witter economist David J. Greenlaw.
By sectors, analysts generally look for services to increase and manufacturing to be lower to flat. Construction, despite higher interest rates, could still see a boost from post-hurricane activity.
Average hourly earnings rose an above trend 0.5% in September and are seen up a much more modest 0.2% in October, though there could be a downward risk for the bond market "if the wages number doesn't revert back to trend after last month's sizeable gain," according to CIBC Oppenheimer economist Avery Shenfeld.
Morgan Stanley's Greenlaw adds that while the September wages were boosted somewhat by a small shift to higher paying jobs, "earnings gains were widespread across industries, pointing to some underlying acceleration in wage growth."
The average workweek is seen a tick higher, rising to 34.5 in October from 34.4 the previous month, but is generally seen as an uptick to trend following a depressed reading in September due to the hurricane.
The unemployment rate, meanwhile, is seen remaining unchanged at 4.2%.
TALK FROM TRENCHES: TSYS EXTEND GAINS BUT OUTLOOK UNCERTAIN
By Isobel Kennedy, Rob Ramos, Joe Plocek
NEW YORK (MktNews) - U.S Treasuries have extended this week's gains today. The back end continues to
outperform on short covering and some outright buying.
Who has been buying this week? Hedge funds in 5s, 10s and 30s. A major European national bank bought off the
run 10s vs selling short dated coupons. This same account was buying 5s, 10s and off the run long bonds last week.
Other central banks have been buying off the run 2s and 5s this week. Real money accounts are finding some value in
2008 and 2022 sectors. Ongoing talk of asset allocation trades out of European bonds into U.S. treasuries.
But long term the outlook is anything but certain. Oddly, some long time bulls, who finally are getting some
satisfaction, are turning bearish.
And some long time bears are now calling for lower rates.
The new bulls think some of the Fed hikes so far are having the desired effect: 1) Car sales are slowing and since
they are a main building block for retail sales and consumption, these figures should start to show some moderation too
2) Housing sector is peaking with starts down 17.7%; mortgage applications slipping; office vacancy on the rise 3)
Consumer confidence may be waning especially given recent stock market swings.
Of course, these are just some early signs of slowing. In order to justify still lower rates, deeper signs of economic
slowdown must be seen. And one analyst said the Fed must engineer a U-shaped recovery by keeping pressure on the
financial markets. A V-shaped recovery in stocks and bonds will not accomplish a lasting slow down.
But for now, the tone of the bond market stays constructive for now. After all, with so many central banks poised to
raise rates (ECB/BOE/BOC/FED) there must be some confidence out there that inflation will be contained.
Another plus was today's refunding announcement showing the Fed will sell $15 billion 5s next week but only $10
billion in a re-opening of the current 10Y issue. If Treasury was to sell a new issue, the Street estimated it would be for
$12 billion.
The new bears have become very pre-occupied not with a Fed rate hike on Nov 16, but the possibility the Fed will
maintain a tightening bias for some time to come. That could lead to more actual rate hikes, they say.
Back in the old days, the Fed just tightened. It seems that this adoption of a tightening bias in lieu of just pulling the
trigger has the Street confused. And that is why some veteran players think they should have just jacked up rates in
Oct.
Why are they confused? If there is a tightening Nov 16, will the bias slip back to neutral? And what does that mean?
If the bias remains for a tightening, will this imply more tightenings in Dec or Feb?
No one knows. But take heart in the fact that even the Fed does not understand "tightening bias". The FOMC
appointed a committee in August to define what exactly it is trying to convey by adopting a bias. Some of the confusion
may stem from the fact that late in an expansion there is no clear sense -- inside the Fed or on the Street -- about how
much tightening is appropriate.
And where is all this worry about so many additional tightenings coming from? Right now most economists are
calling for one or maybe two tightenings, at most.
Last week, a major economist was misquoted by another newswire that said he was calling for 4 additional
tightenings. In reality he was only calling for two more. Amazingly, there was no reaction in the bond market to the
inaccurate story.
Late yesterday an economist at J.P. Morgan Securities confirmed his shop added another 1/4 pt Fed rate hike to its
forecast. They now look for the Fed to hike funds 25 BP on each of 3 upcoming dates (Nov 16, Mar 21, and Jun 28),
for a total hike of 75 BPs. Once again, little reaction from the Street.
The 2Y-30Y curve has flattened from +41 last week to +33. And the 2/10Y curve at +20 is near a key support
trendline. Some analysts think it could flatten more for the following reasons:
1) Given expectations that the Fed will inject liquidity into the system for year end, the Nov 16 FOMC is seen as
the last tightening or "window of opportunity" until the Feb FOMC.
2) Assumptions the Fed will maintain a tightening bias would cap equities while higher yielding bonds would attract
investors.
3) Tighter credit spreads coupled with expectations of a glut of corporate supply in Jan should spark profit taking
ahead of year end with proceeds going into treasuries.
4) The significant back up in treasury yields since last Oct has portfolios short benchmarks and the monthly
extension of indices should be greater than average in Nov due to refunding.
5) Less supply of treasuries along with approximately $23B in coupon payments will likely find a home in longer
paper as liquidity becomes "paramount" for Y2K.
In other matters, there has been talk of some accounts looking to sell German bunds and buy Treasuries. Sources
think this is due to the expectation of rate rises in Europe tomorrow. The ECB is expected to move 25 or 50 bps while
the Bank of England is expected to raise rates by 25. By the way, the Reserve Bank of Australia did hike rates by 25
bps today, its first hike in five years.
Looking ahead, at 2 p.m. ET the Beige Book gets released. Since it was prepared for the upcoming FOMC
meeting, players are expected to study it with a fine-toothed comb to figure out what the Fed will do on Nov 16.
Keep in mind, the market has not forgotten about Friday's employment report either.
Interesting, there were rumors overseas that a U.S. agency may issue a 30Y sterling denominated note soon. Fannie
Mae, for one, has issued sterling paper before, sources say. They also say the dearth of supply in the U.K. sterling
bond market means such a deal could be quickly snapped up.
For those U.S.-based treasury salespeople who wonder who is doing all the buying lately when you are seeing no
business, these figures were released yesterday: U.S. Treasury data show a $22.5b surge in foreign holdings of USTs in
Aug, with $2.5b bought by Japan, $2.2b by the UK, $1.3b by China, and $0.9b by OPEC countries. Another $7.1b
was bought in Netherlands Antilles -- probably reflecting hedge fund activity.
NOTE: Talk From the Trenches is a daily compendium of chatter from Treasury trading rooms offered as a gauge
of the mood in the financial markets. It is not hard, verified news.
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