U.S. equities traded well again this week in response to positive headlines that China and the U.S. will continue to negotiate tariffs, as well as the anticipation of an agreement on a new spending bill which will be signed today, and tame inflation readings. Even with some concerns about slowing global earnings growth, the threat of a global slowdown and or recession, and a poor reading of domestic retail sales for the fourth quarter, for the moment equities continue to push these worries aside. We think a lot of the excitement about equities has to do with the Fed’s pause in both rate hikes and balance sheet reduction. Risk on trading is now in full effect as market participation works under the assumption short-term interest rates will remain low both domestically and abroad. Home buyers are returning to the marketplace enticed by low interest rates and price declines. By all accounts, the U.S. economy is robust as mortgage applications rebound and consumers continue to feel good about their future prospects. With bonds, too much good news is bad, and we continue to feel compelled to advise clients that with the 10-year Treasury under 2.700%, we believe locking-in is advisable.
Global yields continue to move lower benefitting borrowers in a significant way. Domestically, the so-called “Powell Put” has helped equities rise as traders have greater confidence in bidding on riskier investments.
The 10-year Treasury is trading under 2.65% which is making mortgage rates ultra attractive again and from what we can see, increased loan volume greatly. While our domestic rates are low, rates are even lower across the pond. In fact, there are hints that the European Central Bank might soon lower short rates in the face of a slowing European economy, Brexit confusion, and looming Italian debt concerns. Add a deflationary Japan and a slowing China economy to the mix, and therein lies the reason our domestic rates while low are actually quite high in relation to the rest of the developed world.
No big economic news this week, but next week will be important with multiple inflation reports coming out. If inflation remains tame, we could see rates move lower. Should we get a surprise higher on inflation, rates will adjust quickly. The Fed calmed markets late last month as they confirmed rates increases and the Fed balance sheet reduction was not on auto-pilot. A hot inflation reading could challenge those statements, especially with a booming U.S. economy, and historically low unemployment.
Home buyers are taking advantage of these low rates, and with a drop in home prices, we are seeing greater activity from buyers. We remain biased toward locking-in rates at these low levels (to be fair, levels we thought we would not revisit again for quite some time).
Bonds have been on a tear as rates have dropped in response to a variety of factors including a very volatile December for equities, a slowing global economy, Brexit, Italian debt fears, trade tensions with China, and dysfunctional political system in Washington.
The Fed this week confirmed that it will continue to be data-dependent and that monetary policy is not just simply running on auto-pilot. This was positive for both equities and those relying on debt financing.
On Wednesday, the Fed chose to keep overnight lending rates at current levels and also opined on the direction of the Fed draw down its balance sheet, also known as Quantitative Tightening (QT), as well as future rate hikes. A few months ago, most economists had three rate hikes forecasted for 2019, now, the consensus is for probably only one rate hike. All of this has pushed the 10-year Treasury yield (the benchmark lending rate to under 2.75%) which has helped increase mortgage applications, amongst other requests for credit.
The widely watched monthly jobs report did not disappoint and pushed up yields a touch this morning. The report was very positive with 304,000 jobs created in January. The unemployment rate ticked up to 4%, but so did the Labor Force Participation Rate (LFPR). Three-month average job creation is running at 240,000 jobs per month, a very strong number. During the Obama presidency, many economists though numbers like this would be unattainable this late into an economic expansion. Wage inflation remains in check (as do other inflation readings). Geopolitical concerns have taken a back seat to the resilient domestic economy for now. The U.S. equities market snapped back from an awful December with the strongest January in years. Historically low rates are still in play along with strong U.S employment and positive earnings from many big companies.
It is worth noting that some consumer confidence readings have slipped and how this will play out may not be felt for several months in the economic readings.
With rates on the rise after this strong jobs report, we believe it is prudent to strongly consider locking-in interest rates at these levels.
Government, investment grade, and mortgage rates remain low amidst uncertainty over the government shutdown, China trade negotiations, the Brexit outcome, and overall concern about a slowing global economy. As stated previously, Wall Street likes gridlock so it is no surprise to see U.S. equities rise in the face of a government shut down. Furthermore, the Fed has been fairly clear that we may be closer to the neutral rate of interest than previously thought, as well as slowing the reduction of the balance sheet which has been draining liquidity out of the financial system. These measures have served as a boon to equities.
Low rates have helped mortgage applications. Home sales have slowed which has forced some re-pricing that has benefited many who have waited for a break in the upward trend in housing prices.
With interest rates on the 10-year Treasury note under 2.800%, we remain cautious and are biased toward locking in interest rates at these levels. Should the government open and should we see more positive discussions on the China trade negotiations, we believe rates may move higher and possibly, very quickly.
The effects of the partial government shutdown
Interest rates are drifting higher as the damage caused by last month’s brutal volatility washes out and the focus returns back to earnings, the economy, global trade, and inflation.
We will learn more about earnings in the coming weeks, but it has been a mixed bag so far. With respect to the economy, the U.S. economy remains strong, but across the pond, Europe’s economy appears to be slowing along with China. The global economic slowdown is a big concern and is partly responsible for the drop in interest rates that took hold late last year and continued into 2019. Counteractively, a slowing economy could be good for stocks as it will keep the Fed from raising rates.
Secondly, the effects of the government shutdown (if it continues), will become a drag on future confidence readings and overall GDP if it’s not resolved soon. However, keep in mind, Wall Street loves political gridlock and the surge in the stock market is evidence of this.
Thirdly, there are rumors that the U.S. and China are working together on a trade deal. Stocks are higher on this news and bonds have sold off a touch as the risk of an all-out trade war subside.
Finally, inflation remains in check even with full employment here in the U.S. This is a big positive for bond yields along with the Fed clearly stating their intention to remain patient.
With the recent upward trend in stocks, and, the 10-year Treasury Bond trading below 2.80% yield, we remain biased toward locking-in interest rates given recent events.
After a gloomy start to the week, U.S. equities rallied significantly to the delight of traders and investors. While the equity markets are poised to close lower for the year, a strong rally on the day after Christmas stock rally and a follow up positive close took some risk off the table with respect to if “Mr. Market knew something the rest of us didn’t”. Part of the recent volatility can be attributed to year-end tax selling, but the violent moves appear to be the result computer-driven algorithmic trading. Volatility is usually a benefit to bonds, and given the strong economic data and low unemployment rates throughout the year, we are glad to report the 10-year Treasury is well under 2.82%. Around the developed world, interest rates remain accommodative as both China’s and Europe’s economy show signs of slowing. Whether or not a recession is on the horizon is debatable, but low rates appear to be needed to keep the global economy moving forward.
With inflation in check, a volatile stock market, the threat of ongoing trade tensions with China, as well as a partial government shutdown, we see interest rates remaining low for the first few months of the year. This reprieve in interest rates should be a boon for home buyers who were worried about rising interest rates and a slowing housing market. Banks are fighting hard for home loans and we look forward to helping our borrowers and referral partners in the coming year find the best loan they can.
As the end of the year quickly approaches, market volatility has spiked and fear over a slowing economy, global trade tensions, and a government shutdown have taken most major global stock indexes into bear market territory. Long-dated bonds have traded (as expected) higher as the flight to quality has pushed 10-year Treasury yield to under 2.80%. Parsing out the negative news stories that continue to be the focus of concern lately, it is important to remember that our economy remains strong, employment remains at historical lows, and inflation is contained. However, for the moment, the markets are focused on negative headlines, and stocks are getting beaten down.
In economic news this week, the most anticipated Fed meeting in years ended as we predicted. The Fed raised overnight lending rates by .25%, and while the Fed comments were dovish with respect to anticipated future Fed hikes, the market wanted more. The lack of the so-called “Powell putt” to soothe the markets increased selling throughout the week. However, if the Fed focuses on the data, we don’t foresee 3 or 4 rate hikes next year.
The Fed’s favorite gauge of inflation, the Personal Consumption Expenditure (PCE), came in as expected on Friday, yet another reason to support not raising rates any time soon.
In housing, buyers and sellers are working well together to make a deal and lenders remain committed to closing loans, a major source of revenue for most non-money center banks.
Global equity markets continue their wild ride as major daily swings with a bias to the downside have become the norm. Long-dated bonds have benefited from this volatility as the 10-year Treasury yield has dipped to 2.90% from a high just a short while ago above 3.24%. There are several reasons for the drop in interest rates, but the main negative themes continue to be U.S.-China trade and tariff tensions, a partial inversion of the yield curve, fears of a slowing global economy, the end of QE in Europe, ongoing QT in the U.S., and European political issues including Brexit as well as French protests over rising fuel costs.
Economic data was light this week with only one big headline report, the consumer price index (CPI), which showed that inflation is currently contained, which is positive for bond yields.
However, with both a slowing housing market across the U.S. and what seems to be a general slowdown of global economy, relatively low rates are needed to continue to spur the economy. With that in mind, we will be carefully reading Fed comments next week. We do expect a .25% increase in the overnight banking rates to be accompanied by very dovish commentary. Hopefully, The Fed’s comments will provide a much-needed tonic for the current market negativity.
Lenders continue to price aggressively as the need for business outweighs the need for yield. We continue to see attractive rates across the lending spectrum which is a good thing for new home buyers. With rates near 2.90%, we are agnostic as to the next direction in interest rates and are very curious to read the comments from the Fed next week.
The markets were strained again this week by a confluence of factors including a slowing economy, European geopolitical issues, inconsistent messaging from the White House on the trade talks with China, and finally, an inverting of the 5 minus 2 U.S. Treasury yields. All of this meant it was a terrible week for equities.
The Jobs Report came in under expectations, which may ultimately be viewed as a good sign from the standpoint of placing a hold on raising short-term interest rates. Some Fed officials commented Friday mid-morning that a pause may be in order given the recent market turbulence. Personally, I believe the Fed will increase short-term borrowing rates by .25% in December, but temper the effect of the rate increase with dovish commentary and a lowering of expected rate increases within the 2019 and beyond forecast.
The actual November Jobs Report came in lower than expected with 155,000 new jobs created against estimates of 189,000. The unemployment rate remains unchanged and one of the lowest on record at 3.70%. The Labor Force Participation Rate remained steady at 62.90%. Wage growth did not rise above the October reading (a benefit for bonds) as wage inflation appears to be growing at a manageable pace.
Those borrowers and businesses relying on debt were happy to see the 10-year Treasury note, the benchmark for financing costs from auto-loans, corporate debt, and real estate purchase, fall to around 2.85%.
With the major downward drift in interest rates, we are heavily biased toward locking-in interest rates at these lower levels. While we don’t foresee interest rates rising rapidly, we do not foresee long-dated interest rates falling much further from these levels. We must remember that overall the U.S. economy remains strong and job creation remains positive.
Dovish commentary this past Wednesday from Federal Chairman Jerome Powell was just what the doctor ordered for both the equity and bond markets. Backing off of comments made a couple of months ago, the Fed Chair stated that Fed policy was closer to the neutral rate, in which Fed policy is neither too accommodative or too restrictive. While we still believe the Fed will raise in December, this gave markets some relief on the prospect of future rate hikes by the Fed, which has been a source of concern for many market participants who have felt the U.S. economy was still fragile and could be derailed by an aggressive Fed rate policy.
We liked the comments from the Fed and their reiteration that they will remain data dependent. The U.S. economy is in good shape for the moment with historically low unemployment levels, no threat of runaway inflation, the fear of a slowing global economy, a looming potential trade war, quantitative tightening, and a mild correction in housing. All these factors support keeping interest rates low for longer.
With the 10-year Treasury trading right above 3%, we are biased toward locking-in interest rates given the move lower. President Trump and President Xi will meet this weekend at the G-20 to hopefully resolve the trade tensions. Should the meeting surprise to the upside, rates could quickly move up on any positive news.