Nonfarm payrolls fell 62k in June, 2k more than forecast, and May’s originally reported 49k decline was revised to match the June result, for a total of 124k jobs lost in the last two months. Payrolls have contracted every month this year, with a total of 438k jobs lost year-to-date, wiping out most of the jobs added in the second half of last year. The unemployment rate remained at a four-year high of 5.5%; it was expected to decline to 5.4%.

Manufacturing payrolls fell 33k, 3k more than expected, marking two full years of consecutive monthly declines in factory jobs, a stretch during which nearly two-thirds of a million manufacturing jobs have been shed. May’s factory payrolls contracted 22k, revised from -26k. Average hourly earnings rose 0.3%, matching both the forecast and the May increase, for a YOY pace of 3.4% - in line with expectations, but down a tick from May. The trend in earnings YOY has moved steadily downward since the end of 2006, and is now almost a percentage point lower than at that time. The average workweek held steady at a fairly light 33.7 hours, as expected.

The service sector actually added a net 7k jobs, but all of those came in the education, healthcare, leisure/hospitality, and government sectors. Financial services employment contracted, as did business services and retail. The construction trade lost another 43k jobs, bringing the year-to-date total to 261k.

Initial jobless claims spiked last week, jumping 16k to 404k, just off the cyclical high set in March, and only the second foray above 400k since 2003, excepting the post-Katrina spike. Filings were 19k above forecast, and the prior week’s claims were revised up 4k. The four-week moving average climbed to a cyclical high of 391k.

Continuing claims fell more than expected, declining to 3.116M from the prior week’s 3.135M, which was revised down 4k. The forecast was 3.125M. Still, the four-week moving average rose further, to 3.111M, and with the last few weeks’ initial claims and the one-week lag in reporting ongoing filings, this number has nowhere to go but up.

The jobs numbers this morning give us pause to consider where the labor market may be headed. Economists from both Lehman Brothers and Goldman Sachs are forecasting a continued decline in employment, with the jobless rate peaking in late 2009. "Clearly, there are more jobs to be lost in housing, finance and construction – hundreds of thousands of more jobs to be lost collectively," according to Goldman’s economist.

The ISM Non-manufacturing Index fell to its second-lowest point of the cycle, at 48.2 for June. May’s reading was 51.7, and a more modest decline, to 51.0, was expected. The decline puts the service sector metric back below neutral for the first time in the second quarter; it languished there throughout the first quarter. Recall that the plunge in January triggered a sharp selloff in equities. Prices paid in the service sector surged from 77.0 to 84.5.

Yesterday’s delayed release of the Radar Logic Composite home price index showed a 14.67% YOY decline as of April, consistent with the 15.3% decline reported by S&P/Case Shiller.

The ECB raised its overnight lending rate by 25 bp today, as widely expected, and ECB President Trichet indicated the move was unanimous and that there was "no bias" regarding future policy moves, a signal the central bank may see one move as sufficient to rein in inflation in the Eurozone.

Bond yields were up following the jobs report, with the ten-year yield rising more than the two-year as concerns mount that the weak economy will hinder the Fed’s ability to raise rates this year to contain inflation. After the much weaker-than-expected ISM report, they retreated. The two-year yield is down 7 bp at 2.50%, and the ten-year is off a basis point at 3.95%.

Oh, to be a stock trader, and have that uncanny ability to see the silver lining in every dark cloud. In spite of the gloomy payroll report and the bad news on initial claims, stock index futures traded higher before the opening bell today, "on speculation the economy remains resilient," according to one headline. After actual trading opened higher, the story was revised to "stocks are up because the weak jobs number means the Fed won’t raise rates this year." We interpret this as "we don’t want to go into the Fourth of July holiday on a three-day selloff into bear territory." Alas, this firework turned out to be a dud, as equity indices are now below yesterday’s closing levels, extending the week’s losses.

The bond market will close at 2:00 pm EDT today in observance of tomorrow’s Independence Day market close. Happy Fourth, and have a great weekend.