Employment Report

The bond market has priced in a reduction in interest rates but if the employment report does not begin cooperating, don't look for the Fed to accommodate anytime soon. Today's employment report was stronger than expected with a 132k rise in payrolls and previous months revised up, as well. We still expect payrolls to weaken in coming months. The weakness beginning to show up in manufacturing and construction is a harbinger of change in the balance of the economy.

This expected weakness has yet show up in the latest unemployment rate, which reversed only a part of the prior months decline. Yet, UBS says, "The share of consumers perceiving that jobs are hard to get has risen a little in recent months, while the share saying jobs are plentiful has edged down. That pattern is typically associated with a rising unemployment rate."

The employment report smacked bonds with 10-year treasuries rising 7 basis points on the news today and up 15 basis points since the lows of last week.

Strategy Update: We recently moved to a defensive posture in the Dynamic Duration Select Strategy, which should benefit the strategy in the event of continued increase in interest rates. The Strategy has seen solid outperformance, nearly doubling the return of the Lehman Aggregate Index (shown here as AGG) since the bottom of the bond market in May.