High Unemployment bodes well for interest rates...unfortunately.

Today's Market Commentary
The curve steepened slightly on Thursday with the two-year's yield falling 5bp while the ten-year was little changed and the yield on the long-bond rose a touch. Trading activity was light ahead of today's payroll report. This morning, bond prices are sharply higher with two to five-year yields down 15bp to their lowest levels of this cycle following a disappointing employment report. The economy created a mere 18,000 non-farm jobs in December, well below the anemic estimates of 70,000. The prior report was revised higher by 20,000. The unemployment rate surged to 5%, up 0.3% to its highest level since 2005. There were new seasonal adjustments for the unemployment rate but weakness in the employment situation was widespread throughout the report. The weak job growth was consistent with recent rises in initial and continuing claims. The news will increase discussions of the possibility of a 50bp Fed ease at the end of this month. Already, Fed Funds futures for February are pricing in a 20% chance of a 50bp ease and a 25bp ease seen as a certainty. This morning's Wall Street Journal contains an article by Fedwatcher Greg Ip which discusses the Fed's discomfort with recent inflation news. The timing is interesting since it follows, by just a couple of days, the minutes of the December FOMC meeting which indicated expectations that inflation will be on the decline. However, inflationary concerns, coupled with a fear that it will run out of ammunition, could hinder the speed of Fed easing. Regardless of timing, this economy looks to be in need of significant additional easing by the Fed. Yields are falling sharply across the product spectrum with spreads holding in quite well.

Given the recent economic data, Goldman Sachs is predicting a 50 bps Fed cut on or before January 30.  This includes the possibility of an intermeeting rate cut, though this would probably require a major downside surprise in consumer spending within the next ten days.

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