Today's Employment Report

This morning, the January employment report was released. The consensus estimate for job change was +150,000, partly related to what was considered to be warmer-than-normal weather nationally in January. When the number was initially released, it appeared that employment change was slower than expected: +111,000. BUT, prior months were revised up significantly higher, RULE: ALWAYS LOOK AT REVISIONS TO PRIOR DATA BEFORE ANALYZING THE MOST RECENT DATA POINT. Here is an article about the report that you should read.

Along with employment change, the government released the January unemployment rate (slight rise to 4.6%), hours worked (slight decline), and the change in average hourly wages (+0.4%).

When the employment report is released, market participants attempt to gauge the implications for growth and inflation. As we will see this week, nominal interest rates are a function of both of these, so interest rate implications are critical when this report is released. And, it took a while for the markets to "digest" all that was going on with this report. The graph below shows this, focusing on the 10-year bond rate. It is from MarketWatch.com and has OHLC bars for 15 minute intervals to show more immediate and ongoing reactions. The double vertical line in the middle of the graph denotes the end of trading on Thursday. To the right is Friday (today) and the reaction to the job report. Can you see the obvious manifestation of initial confusion by the market for the 10-year bond rate.? Actually, the relevant question is how can you miss it?

The inflation implications of the report are derived from the behavior of the unemployment rate (it relates to resource utilization) and the hourly wage change (which could put upward pressure on prices when it rises "a lot"). In general, when the unemployment rate falls, this is taken to signal tighter labor markets and upward pressure on wages and prices in the future. Translation: higher future expected inflation. How inflationary depends on where the rate is and how much it changes. The lower the unemployment rate, the more inflationary will be the impact of declines. Similarly, the more rapid is growth in the average hourly wage, the more inflationary is it taken to be. We will see later in the course that productivity should also be taken into account to make a more proper determination of this (called Unit Labor Cost), but productivity data are only released quarterly.

Follow the 10-year rate for the remainder of the day. What ultimately happened? Compare the daily bar in StockCharts.com to the prior day. Also, look at the 10-year on a weekly chart.

Assigmnent #3

A number of persons had incorrect answers for the first two questions in Assignment #3.

1. As Md = f(r) but not a function of Y => Md is downward sloping but it does not shift for changes in Y. Thus, there is only one equilibrium r, no matter what the level of Y is. Therefore, the LM curve is horizontal.

2. You need to read the chapter on AD - AS for this. Yf is obtained when labor market equilibrium occurs (where labor demand = labor supply). This gives L*, which when plugged into the production function gives Y* (or Yf).

3. The data you obtained was for the nominal interest rate (the 10-year constant maturity rate) and the real interest rate (the Treasury-Inflation Indexed note). The basic formula to relate these is:

Real r = Nominal r - expected inflation

Solve this for expected inflation:

Expected inflation = Nominal r - Real r

The result is what is referred to as the "TIPS spread." It provides a real-time measure of the value of inflation expectations for the next 10 years (in this case). REFER TO THIS IN THE FUTURE AFTER YOU COMPLETE THIS COURSE -- IT IS VERY IMPORTANT AND OFTEN REFERRED TO.