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Credit Insights

Looking Ahead From Last Week's Roller-Coaster Ride

Headline payrolls numbers disappointed last week, but the bond markets rallied on underlying private-sector strength

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It was a roller-coaster ride last week. On Monday, corporate credit spreads continued to widen as the risk-off mentality carried through from the prior week. In addition to pressure emanating from the emerging markets, U.S. markets fell due softer than expected auto sales, manufacturing data, trade data, and construction spending. However, by the middle of the week, markets bottomed out and the "buy the dip" crowd was out in force on Thursday, pushing credit spreads slightly tighter. On Friday, markets initially plunged lower after the Bureau of Labor Statistics reported a disappointing payroll headline. Non-farm payrolls grew a meager 113,000 in January, far below economists' estimates; in fact, it was even below the lowest estimate. While the headline number was certainly below expectations and the markets initially gapped downward, markets almost immediately began to retrace their losses and then rose throughout the rest of the day.

Even though the headline report was below expectations, the markets focused on positive momentum in private payroll growth underlying the headline figure. For example, within the construction and manufacturing sectors, jobs grew 69,000, one of the best single-month readings since the beginning of the recovery. This is certainly good news, as Morningstar's Bob Johnson highlighted that these are great paying, high hours type of jobs. However, he cautioned against reading too much into this report, as this job growth will be hard to match in months ahead, and may represent a bounce from weather-afflicted December data. Robert also drew attention to some sector issues that are troubling to him. The health care and education sectors continued to be soft, adding almost no jobs for the second month in a row after being the bulwark of job growth for a large part of the economic recovery. Given the report for productivity growth released earlier last week, the payrolls numbers are consistent with Robert's forecast of GDP growth this year between 2.0% and 2.5%.

David Sekera does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.