The document provides an analysis of the September employment situation report released by the Bureau of Labor Statistics. Key points include: - The report showed 173,000 new jobs added, at the low end of estimates. However, August numbers are often revised upward. - The unemployment rate dropped to 5.1%, below estimates, indicating more people found jobs. - The participation rate remained steady, suggesting new jobs were filled by those already in the labor force. - Markets initially dropped on concerns the report could encourage an interest rate hike. However, the report did not strongly indicate the economy was growing rapidly or that inflation was a risk, so the Fed may not raise rates in September.

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By John Becker
Topic of discussion: Employment situation
Published 4:30pm September 4th
All graphs in this report will be provided at full size in Appendix 1-6

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Surface view of the September 4th
Friday employment report.
John Becker
This morning an hour before the markets opened for the day the Bureau of Labor
Statistics released a situation report on US employment. This report gave us lots of insight into
how the economy is doing and the direction it is heading by looking at different aspects of
employment in the US. The statistics in today’s reports ultimately were controversial there was
good news and bad news, both of which need to be weighted, to see what the economy is
doing so we can decide what the markets will do with this news.
So what are the important numbers? Well in my opinion there were three highlights
that jumped right off the page and told a very clear story individually.
 There was an estimated nonfarm payroll employment increase of 173,000 jobs created.
 This was the bottom of the barrel so to speak because the consensus range (range that
was considered the estimate of how many jobs would be created) was from 173k to
257k jobs. So at face value this is not good news.
 The unemployment rate dropped to 5.1%
 This is a good, or to be honest a great number, because the consensus was for the rate
to maybe drop to 5.2%, however it exceeded the consensus and had a substantial drop.
This means more people found jobs that were wanting to find jobs.
 The participation rate stayed steady at 62.6%
 This is a low number, but it was just as low the previous month so it gives us positive
data. This rate tells us that since it did not change, but the unemployment rate
decreased, more people found jobs that were looking for jobs before and were already
calculated in the participation rate. So coupled with the unemployment rate this
number is a positive statistic.
To simplify, the two major factors of this employment situation report was the Jobs report and
the Unemployment rate (when coupled with participation rate).
The good, the bad, and the economically stable???

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Jobs Report
The jobs report as stated in the
introduction to this report was at the
minimum consensus. This does not bode
well for economic growth; however there is
a silver lining in the fact that the August
estimates are historically underestimated.
August is a month in which you can look at
the data from the Bureau of labor statistics
and see that they are constantly revising
this number upwards.
In 2011 the number of jobs
estimated was revised from 0-57-104k for
August.
2012: 96 - 142 -192k
2013: 169 – 193 -238k
2014: 142 – 180 -203k
Chances are probable that this month’s
173k jobs will be revised upwards making it
not such a terrible number if you consider
revision.
What does this number mean for the
economic climate?
This is definitely not the kind of
number you would march up to the Federal
open market committee and state that
there is no way they can deny the economy
is growing because of this figure. It also
however does not give the impression of a
weak economy that would cause the FOMC
to not even consider a rate hike. This
number by itself is very much a neutral
figure. Bill Gross even goes as far as to state
in an interview for CNBC that “The jobs
number was mediocre, but decent, and
probably in terms of Janet Yellen and the
Fed, sufficient for either September or
December.”
What would you expect this number
to do to the market?
This month’s employment report was an
oddity in the sense that the effect of the
employment report on the market would
not mirror the effects of the last few
months or even the last year, because this
September on the 17th the FOMC will be
deciding what they are going to do with
Interest rates based on the wellbeing of the
economy.
To put it in perspective, normally a good
economic outlook is great for the markets
because it shows investors that companies
are doing well and this forecasts that
companies will continue to do well in the
near future. This means that good
employment report = rally in the market.
What do the numbers mean?

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This month however this good
employment report could cause the FOMC
to see an opportunity to raise interest
rates, which could end up causing adverse
effects on the market.
Today’s employment report was as stated
before a big deal because it is so close to
the FOMC decision date.
So what exactly happened today
when these numbers arrived? Well
before I talk about the way the jobs report
affected the market let’s talk about what
the Unemployment rate decrease so we can
tie the two together and see the collective
effect on the markets.
Unemployment Rate
The unemployment rate was
estimated at 5.1% which is the lowest rate
since April of 2008.
(You can find an enlarged version of this
graph in the index of this paper.)
So what does such a low
unemployment rate mean? It’s
basically telling us that people wanting jobs
are getting jobs, and this lets us know that
the economy is showing signs of strength.
People want to work when the economy is
thriving.
What does this number mean to the
Federal Open Market Committee?
The FOMC could see this as a good
economic indicator because the Federal
government sees a rate of 5.1% as pretty
close to full employment. Perhaps this
figure can lead the Fed to find reason for
rate hike.
What would you expect this figure to
cause the market to do? Normally a
good Unemployment rate would lead
investors to believe that economy is going
to thrive, meaning companies are going to
hopefully grow, and ultimately driving up
security value. However this might not be
the case this month because like I have
stated time and time again, the FOMC will
be using this figure along with plenty of
other statistics to see if they should hike
up (raise) the federal funds rate.
What exactly happened today with
the release of the Unemployment
rate?
As stated before there is no way we can see
the effect of just the employment rate on
the market this month because the number
of jobs created changed from last month?
There is no way to examine the sole effect
of one unless you have one figure held
constant. So in the next section of this
paper let’s examine what the market did
today, and what it has done in the past
during previous rate hikes.

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We are going to examine the market
in a few different ways:
For one we are going to look at the way the
S&P 500 moved today, and also how the
Futures market for the S&P moved.
Secondly we are going to look at how the
S&P moved in the past when the Fed raised
rates.
Thirdly we are going to do the exact same
analysis that we do for the S&P and mirror
it for the Credit or Fixed income market by
examining the 10 year US Treasury Bond.
Lastly we are going to look at what
happened to the US dollar, so that we can
determine what the opinion on Inflation in
the market is.
How did the S&P 500 move today?
The S&P market did not have any great
change today; you can see this graph in the
next column over that shows that when the
market opened there was a significant drop
in the index price because people were not
satisfied with the report.
Is this a normal reaction to an employment
report? Well sure if the employment report
was bad; however this wasn’t exactly a
horrible report. It was not the best report
of the year, but is this drop in price
justified?
I don’t believe that this is a justified drop
in price based solely on the employment
report numbers, I am willing to bet that the
reason the market reacted this way is
because we are in a sort of lose, lose
situation. If we don’t see growth the
market will dive because investors want
growth. Alternatively if the economy is
growing the fed might raise rates causing
the market to dive as well, so there is not
many ways around the market making a
short term fall.
What was the effect on the market?

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How did the Credit market move
today?
The credit market had slightly more
movement from today’s report than the
S&P did;
We had over a 3 basis point move which is
honestly a pretty large move for the 10 year
treasury yield, meaning prices were
dropping today.
So was it the numbers from the jobs
report that moved the credit market
and the S&P today or was it the
underlying affect the numbers could
have on the fed’s rate decision?
Well let’s look at the S&P500 in the past
when there were significant rate hikes. And
then let’s look at how the 10 year treasury
did in during those same dates.
First here is a graph of the Federal funds
rate history:
The Two large rate hike dates I want to look
at are the hikes from:
 1972–1974
 1977–1980
From 1972 to 1974:
The Fed hiked up rates and it caused
movement in the credit market big time;
Yields crawled upwards causing bond prices
to go down meaning it was a bad time for
fixed income investors.
What did the S&P do during this rate hike?
It doesn’t look like the market fell nearly as
hard as bond prices.
This seems very similar to what we
observed today in the markets let’s check
the next rate hike and see If we get similar
results.

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Let’s look at 1977 – 1980
The rate hike in 77 caused a similar increase
in 10 year Treasury bond yield over the
three year period;
This is another large leap in 10 year treasury
yields, indicating trouble in the credit
market, and falling bond prices.
And the S&P?
The movement of the market actually
trended in the opposite direction, but what
you should look at is the fact that the
movement itself in both Federal fund rate
hikes, were very small and almost
horizontal, while the credit market (10 year
Treasury bonds) had an obvious climb in
yields.
What does this tell us?
The first thing that pops out to me about
this information is that when the Fed has
raised rates the market has historically
moved just like it did today in different
scales. This signals to me that the
employment report was seen as a good
report in the eyes of investors, so even
despite their small 30% consensus on a rate
hike;
The markets are acting just like they would
if rates were going to rise. Will the fed
raise rates on September 17th? Well that
question cannot be answered with just the
employment report, but what I have
demonstrated is that investors seem to be
putting out rate hike vibes.
One more thing I would like to comment on
for today’s Employment report affect is the
exchange rate between USD and the Euro.
Exchange rates can be good leading
indicators for inflation and the fed moving
rates is closely correlated to inflation
expectations.
I don’t want you to feel like this report is
deviating from the Jobs report and
becoming more of a fed funds rate hike
prediction, but today’s report is so closely
tied with the fed decision in September that
we have to think about things from the
fed’s perspective.

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So what did the exchange rate do?
It opened and closed with very little
movement, only a slight strengthening of
USD. This could be telling us that even with
the good employment report there is not
much risk of inflation. If there is no
inflation the fed will perhaps not see raising
rates as a suitable action to take. Now I
don’t have a lot else to say on the USD
exchange rate other than the fact that the
employment report did not move it
substantially which could show the fed that
even though the economy might seem
strong, people are not inflating it so there is
a case against raising rates right there in
front of them.
Final thoughts and a quick Recap:
The employment report was one to watch
this week. So much uncertainty in the
market, people needed something that they
could use to calm their anxiety. The
employment report was not the answer
however. There was not a one sided story
that it told. The jobs added was not a good
number (with revision it’s not bad), but the
Unemployment rate hit a long time low.
There is a large balancing act of reasons for
the fed to raise rates and reasons for the
fed to not raise rates in every investors
mind right now, and the employment
report did not do much to tip the scales
heavily in one direction.
When I did research into past rate hikes
however I did find that the market reactions
today did slightly mirror past hikes, so it
could be argued that the market consensus
is for a rate hike.
Once again, however, if you look at the
movement of the USD though there is not a
lot of evidence of inflation though so there
is a case against the rate hike.
It is anyone’s guess on what the Fed will do
in September, but hopefully this report on
the employment situation can come in
handy when you need to make a case for
either side of the argument.

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Appendix 1
Source:Bloomberg

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Appendix 2
Source:BOLS

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Appendix 3
Source:Yahoofinance

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Appendix 4
Source:Yahoo finance
Source:Yahoofinance

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Appendix 5
Source:Yahoofinance
Source:Yahoofinance

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Appendix 6
Source:Yahoofinance
Source:Yahoofinance
Source: Bloomberg