Soft Jobs Report Keeps Tapering Thoughts at Bay, Pressures Dollar

The US employment report is disappointing. Fewer people are working, a shorter work week and for lower pay.

The Fed's tapering decision does not rest on a single print, especially of high frequency and noisy data, but on the margins, between the FOMC statement that gave no hint of a move in September,a manufacturing PMI that showed prices falling and now a soft employment report, look for some soul searching by those who thought and acted as if reducing long term asset purchases next month was a done deal.

Non-farm payrolls rose by 162k and the back two months were revised lower by a total of 26k. Hourly earnings fell 0.1%. The market had expected a 0.2% increase. The year-over-year rate slipped back below 2%. The work week fell by 0.1 hours, which is tantamount to the loss of output of several hundred thousand workers.

The fact that the unemployment rate fell to 7.4% from 7.6% says more about the participation rate than the rate of employment. The participation rate fell to 63.4% from 63.5%. It dovetails nicely with our idea that when the Fed does taper, it lowers the unemployment threshold (not trigger) for higher rates to 6.0% from 6.5% presently. That said, the broader measure of unemployment--U-6 fell to 14% from 14.3%.

The dollar fell across the board on the disappointment and Treasuries rallied, with the 10-year pulling back from testing last month's cyclical high near 2.75%.