Fin 3023.002 Fall 2016

Employment Report

Viet Nguyen

Expectations of growth were short lived with an average Employment Situation Report. Even though the report was somewhat dissatisfying, there are chances that bond prices may increase as interest rates on treasuries decrease.

Introduction

he U.S. employment report showed little signs of growth than expected. The Federal Reserve may think twice

before increasing interest rates with a stagnant employment report. On a Bloomberg survey, there was an average forecast of payrolls increasing to 180,000. Although there were small signs of growth, Nonfarm payrolls have risen to 151,000 in jobs compared to the revised increase in jobs of 275,000 in July. The number of people unemployed was relatively unchanged at 7.8 million, with an unemployment rate of 4.9%, as well as a stagnant Labor Participation rate at 62.8%. Average Hourly Earings showed a minuscule increase of 0.1% and the Average workweek for all employees decreased from 34.5 hours to 34.3 hours.

T

ISM Manufacturing IndexIn August 2016 the ISM

manufacturing index dropped to 49.4 which was the first time since February that read below sub-50. With the slight dip in ISM

Mfg index, expectations for the next report may show a slight decrease or consistency within 49.4 and I predict that if there were an increase in the ISM Mfg index that it would be no higher than 51 points.

The graph above that was provided by Bloomberg shows somewhat of a slightly downward trend with September 2014 being the highest peak of the graph. We can assume that within the next month that the updated graph will show a trough or slight increase.

Effects on Treasuries and S&P500

The yield on the 10-yr treasury was up 3 basis points, and thus treasury prices are down slightly. Using the S&P500 as a reflection of the U.S. market, it seems that

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Principles of Investments

markets remained untouched. In CNBC news, Gerald P. O’Driscoll, Jr., former VP at the Federal reserve commented on Janet Yellen saying,

“At the recent Jackson Hole conference, Federal Reserve Chair Janet Yellen stated that the case for raising interest rates had strengthened. She suggested that good job growth would continue. Once again, the Fed Chair has been too bullish in her view of the economy. More generally, Fed officials have been over-predicting economic growth in the recovery.”

With the employment report providing evidence on slow growth, Mr. Driscoll’s comments on Yellen shows evidence that the Feds will not be raising interest rates due to an over bullish prediction.

The graph above from Yahoo Finance shows a comparison between the S&P 500 and 10-yr Treasury. As the treasury somewhat increased, the U.S. market seemed to stay the same. Even though the S&P500 seemed to remain the unchanged, the U.S. dollar rose against a handful of currencies.

Employment industries

Within the 151,000 jobs added, the food and drinking industry constituted about 20% of the jobs added in the amount of 34,000. Financial activities employment added less than half of the food and drinking industry with only 15,000 jobs. Mostly a gain in commodities, investments, and securities. Mining has continued to decrease with a 4,000 reduction in jobs. With the Mining industry showing signs of continuous reduction, so there must be some correlation with crude oil.

The chart was provided by Nasdaq and shows that on early September, oil prices took a dip to about $43.2 per barrel. Although the following days have shown an increase, there is a trend in the graph that shows a steady decline in oil prices. I assume that within the next couple of employment reports that if the Mining industry continues to decrease jobs then oil prices will continue to fall as well.

ConclusionBetween the Federal Reserve raising

hopes of higher interest rates and oil prices taking a dip. It seems that not much happened during the employment situation report. Jobs have increased but about 20% less than expected, ISM index has dropped bellow sub-50 to 49.4 but there are no

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Principles of Investments

indicators of a larger decrease.

With the graph above, it shows that the ISM manufacturing index has been unstable in the previous years but the gap between the dips and peaks are becoming smaller and less volatile. Finally, I would predict that jobs will continue to decrease in the next employment report due to the trend of the previous reports. In June there were a staggering 287,000 jobs added, July had a growth of 255,000 jobs, and currently there were only 151,000 jobs added.

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