Groundhog Day!

Today is Groundhog Day and once again the ADP data exceeded the street consensus estimate. This time by 47,000 jobs. However, the prior data were revised lower buy 50,000 jobs. What does this mean for Friday’s payrolls data? Possibly nothing. Last month, stronger-than-expected ADP numbers did not portend stronger private payrolls data. Friday is going to be interesting.



The street is forecasting 140,000 new private jobs for January (the same as the street’s ADP forecast) and for 143,000 new jobs, all in. If this comes to fruition, this is below the pace believed to be necessary to keep up with the number of new workers entering the workforce or to lower the unemployment rate.



However, the unemployment rate could fall, even with sub-par job growth. Due to the method in which the household survey is conducted, respondents answering that they are not working, but are not actively seeking employment are not counted as being unemployed. An increasing number of discouraged displaced workers can actually make the unemployment rate fall. Conversely, if these displaced workers become more optimistic and answer that they are looking for work, the unemployment rate could rise, even though the job picture is becoming brighter. The devil is in the details.



Today’s Wall Street Journal “Credit Markets” columns discusses floating rate notes and that issuers feel comfortable coming to market with such structures because many investors believe that inflation pressures are building and the Fed will have to raise rates, thereby flattening the yield curve. The article also notes that for the past year, floaters may not have been a good place to be (something alluded to in Making Sense).



The article quotes a fixed income market participant who states:



"People have had the view for the last year, or year and a half, that short-term rates aren't going higher any time soon, and that is not an environment where you think you can make money on floating-rate debt.”





As we published last week, we may be getting closer to the time when the Fed has to take action by raising short-term rates, but that could still be a long way off. Remember, issuers come to market with structures which they believe are good sources of financing for them. Investors can influence the terms of bond structures by voting yea or nay with their investment dollars. Floaters can be valuable hedges versus various outcomes, depending on the structure. However, they are not (as is often explained in basic financial publications of financial adviser training) a way to eliminate interest rate risk. No issuer would ever come to market with such structures for obvious reasons.