What was Behind the Sharp Drop in the Unemployment Rate?
Monday, December 5, 2011
The recent decline in 10-year note futures prices may be short-lived, as the market appears poised for an upside reversal at least back into the recent trading range between 130-00 and 131-00. Some traders who are expecting a moderate rebound in 10-year note prices may perhaps wish to explore the purchase of a call ratio spread in 10-year Note futures options. For example, with the March 10-year note futures trading at 129-17.0 as of this writing, the February 130 calls could be bought and 2 February 132 calls sold for 0-39, or $609.37 per spread, not including commissions. The ideal situation would be for the March futures to be trading near the upper strike price of the ratio spread at option expiration in late January.
Fundamentals
The monthly release of employment data had a few surprises for traders, with the most notable being the sharp decline in the unemployment rate. First, though, analysts hit a bull's eye on the Non-farm Payrolls (NFP) figure, as the Labor Department reported that 120,000 jobs were created in November, which is nearly spot-on the 123,000 jobs that was the consensus pre-report estimate. Of the jobs created, 140,000 were in the private sector, though public sector payrolls declined by 20,000 last month. On the positive side, the monthly revisions to the NPF were positive, with the October figure revised higher by 20,000 jobs, and the September figure revised higher by a whopping 52,000 jobs! What really caught many traders' attention was the 0.4% drop in the unemployment rate to 8.6%, which is the lowest reading since March of 2009. The consensus estimate was for the unemployment rate to remain unchanged. Given the on-target NFP figures, one must ask what is behind the sharp drop in the unemployment rate. The first thing that is important to note is that the unemployment rate is calculated by using a survey of households in the U.S., which uses a much smaller sample size to calculate the figure than what is used from a survey of establishments as used in the NFP calculations. In addition, the unemployment rate calculations take into account only those who are unemployed and actively seeking employment. So if a large number of potential workers stop actively seeking employment, for whatever reason, they are considered removed from the labor force. This can skew monthly unemployment data, which is calculated by dividing the number of unemployed workers by the size of the labor force. So it could be possible for the unemployment rate to fall if a large number of unemployed workers get so discouraged by the lack of job openings that they stop looking for work, or rise if the jobs picture is actually improving enough that many currently unemployed workers start to seek employment which would add to the labor force total. In the case of this month's report, we saw a mixed picture, with the number of people being considered unemployed falling and the size of the labor force also falling, which appears to have skewed the data more positively than it in reality was. The market's reaction after the report was mixed, with equity prices rising and bond prices initially showing declines, before turning higher later in the session, as traders begun to realize that even at 8.6%, the unemployment rate is still too high and a gain of only 120,000 jobs per month will not be enough to bring the employment picture to where the Federal Reserve will halt any accommodative monetary stance.
Technical Notes
Looking at the daily continuation chart for 10-year Note futures, we notice prices falling below the lows of the recent consolidation pattern, only to rebound sharply on Friday. The long-term trend remains bullish, but prices are struggling to move above the 20-day moving average. The recent consolidation appears to be part of a much bigger trading range pattern that started back in August of this year. Notice also that trading volume has decreased during this time, as market participants struggle to determine the next market move. Momentum is starting to return to more neutral levels, with the 14-day RSI currently reading 46.67. Major support is seen at 127-06.0, with resistance found at 131-30.0.
Mike Zarembski, Senior Commodity Analyst
