US Yields More Susceptible to a Lower-Than-Expected Payroll Release

Authored by Simon White, Bloomberg Macro Strategist

The US yields are marginally more vulnerable to a disappointing payroll release today, following Powell's resistance to a rate hike this week. However, leading indicators suggest a potential upward shift in payroll growth in the near future.

Yields and Payroll Disappointment

Although yields have retreated from their recent peaks, they remain susceptible to further decline if payrolls do not meet expectations. My model for determining the fair value of 10-year yields, which factors in global central bank rate policy, the yield curve, oil prices, and the Federal Reserve's policy rate, indicates a 10-year yield approximately 40 basis points lower. This potential short-term pull to fair value is strengthened by Powell's shift in distribution away from further rate hikes at this week's Fed meeting. While yields are expected to rise in the medium and long term (in a yield curve bear steepening), the short-term risks lean towards lower yields.

Payroll Outlook and Unemployment Claims

Today's payrolls could serve as a catalyst for this shift if they turn out to be weak. However, it's important to note that the near-term outlook for payrolls (over the next few months or so) is improving. Firstly, the growth of temporary-help jobs is increasing and usually precedes annual payrolls growth by about six months. Secondly, unemployment claims began to decline towards the end of last year, and this typically precedes payroll increases by about three to six months.

Concerns About Claims Data

There have been concerns about the accuracy of claims data, specifically the number of people claiming benefits due to their insufficiency, or new immigrants who are ineligible for them. Indeed, the ratio of those claiming to the number of unemployed based on the household survey is low. I have suggested that the actual state of the US labor market likely falls somewhere between the household and establishment (i.e., payrolls) surveys.

Claims Recipient Ratio

If we consider the claims recipient ratio based on an approximate estimate of the number of unemployed from the payrolls data, it appears higher than the ratio implied by the household survey (a trend also observed in the late 1990s and early 2000s). Therefore, the recipient ratio does not seem abnormally low when considered between the two surveys.

Issues with Surveys and Claims Data

There are likely several issues with the household and establishment surveys and the claims data. However, the market will trade based on these figures for now, despite their flaws. If payroll growth begins to increase and claims remain low, this could indicate a rise in yields again.

Final Thoughts

This article provides an in-depth analysis of the current state of US yields and their potential vulnerability to a disappointing payroll release. It raises important questions about the accuracy of claims data and the real state of the US labor market. What are your thoughts on this analysis? Do you agree with the predictions made? Share this article with your friends and engage in a discussion. Remember, you can sign up for the Daily Briefing, delivered every day at 6pm.