On Friday, the U.S. employment report was disappointing. During July, 131,000 jobs were lost, with results impacted by the termination of temporary 2010 census staff. The private sector added 71,000 jobs, but expectations were for 90,000, and the unemployment rate remained at 9.5%. On this news, US equity markets initially fell about 1.5%, but moved to more moderate losses by the end of the day. The much larger and more influential bond market (consisting of corporate, consumer and government debt instruments) reacted in a less enthusiastic manner. Notably, the US 10-year Treasury yield dropped to 2.8% (the lowest since April 2009) and 2-year Treasuries dropped to 0.51% (an all-time low).
MY TAKE: While the recent equity rally received significant attention by the media and investors, bearish trends in the bond market, while volatile, should not be overlooked. Recent bond market moves suggest that concerns about slower economic growth and the potential for deflation persist. Additionally, economists have been cutting 2011 U.S. GDP growth estimates (the most recent cut from Goldman Sachs on Friday, reducing its estimate to 1.9% from 2.5%). Some economists believe an annual rate of 3.5% is required to stabilize the economy. Adding to investor confusion are recent positive corporate earnings and manufacturing data. Volatility will likely persist as investors seek answers to: 1) how much of the “good news” resulted from corporate cost cuts and government stimulus spending, 2) how will additional stimulus spending, if it is injected into the system, be interpreted by investors and 3) when will corporations start hiring/investing and stop hoarding cash?