With each new slice of economic data the past few weeks, the bond market decided that the economy was getting softer and the potential for the Fed to start cutting rates was growing. Rates have been drifting down for the past few weeks. And then came today's unemployment numbers. The unemployment rate dropped to 4.4%. The bond market simply threw up. Yields on the 10-year bond rose a breathtaking 12 basis points in just a few hours.
But wait a minute. Why should the bond market worry about unemployment? Employment is a lagging indicator. In fact, the last time the unemployment rate was this low was during the recession of 2001. The unemployment rate was 4.4% in April of 2001. It dropped to 4.3% in May, before it began its climb to 6.3% two years later. The National Bureau of Economic Research tells us that the official dates for the last recession were from March through November of 2001. Note that the unemployment rate was dropping for two months even as the economy was beginning a recession.
This is not an isolated event. It is quite common for the unemployment rate to fall even as a recession is beginning. That is what we mean when we say lagging indicator.