U.S. Unemployment drops, Euro turmoil continues

Treasuries are trading higher as market participants react to this morning’s Tier-1 economic indicators. The 2-year note is trading flat to yield 0.23% while the 5-year note has gained 2/32 for a 0.91% yield. The 10-year note is unchanged yielding 2.07% while the long bond has dropped 12/32 to yield 3.14%. For the record, Nonfarm Payrolls rose a disappointing 80,000 in October, below the expected 95,000 increase for the period. However, the previous month’s data was upwardly revised from 103,000 to 158,000. Among the sectors performing the worst were Construction and Government employment which lost 20,000 and 24,000 positions, respectively. On the other hand, the biggest gainers for the month were Professional and Business Services which reported a 32,000 increase and Leisure and Hospitality which rose 22,000 for the period.

In spite of the disappointing Nonfarm Payrolls report, the Unemployment Rate actually dropped in October to 9.00%. Analysts were actually expecting unemployment to remain at 9.10%. This has been the first time the report showed a decline since July 2011. Although, this number is significantly higher than the historical average, the slight drop in the unemployment rate could mitigate, if at least temporarily, some investors’ belief that the unemployment rate could continue to climb and increase the likelihood of another recession.

Beyond today’s economic data, market participants will pay close attention to what appears to be an ancient Greek drama as Europe continues to be at the epicenter of recent and unexpected news headlines. In addition to what is happening in Greece, Mario Draghi, the new President of the European Central Bank, announced yesterday, the unexpected decision to cut interest rates by 25 basis points to 1.25%. This move was welcomed by market participants as it could be an indication of the Mr. Draghi’s determination to avoid economic contraction in the Euro zone while still focusing on inflationary risks. According to Draghi, inflation is expected to remain moderate as economic growth deceleration in the Euro zone will have an impact on prices and wages. He also urged the leaders of the Euro zone to be resolute in implementing necessary reforms that will improve the finances of their respective governments.

“The Governing Council decided to reduce the key ECB interest rates by 25 basis points. While inflation has remained elevated and is likely to stay above 2% for some months to come, inflation rates are expected to decline further in the course of 2012 to below 2%... the Governing Council stresses that it is absolutely imperative that euro area national authorities rapidly adopt and implement the measures announced and recommended in the Euro Summit statement of 26 October 2011.” ECB President Mario Draghi 11/03/2011