Market Commentary 7/7/17

Bonds held up well in the face of a very strong jobs report, although interest rates did rise for the week in volatile trading. The muted response by the bond market to the June Jobs Report reminds me of the aphorism “buy the rumor and sell the news”.  Bond managers most likely hedged positions ahead of the June job report. The Fed’s Open Market Committee meeting notes were released on Thursday. These notes shined some light on the projected path of short term rate hikes, the Fed’s own view on inflation, as well as how the Fed plans to wind down its enormous balance sheet. Both the U.S. and European Central Banks have opined on the push for higher interest rates as the fear of deflation has subsided. With the German Bund ticking relentlessly higher, it makes it very difficult for U.S. yields to come back down. The German Bund yield sits at nearly two-year highs after the recent breakout. In the absence of a retreat in global yields abroad, it is hard to see much lower rates in the near term domestically.

Jobs Report

The June jobs report was robust with 222,000 new jobs created versus 185,000 expected. The Labor Force Participation Rate ticked up to 62.80%, but still remains at multi-level lows. However, wage inflation remains stubbornly flat and was a tonic for bonds. Inflation is the arch enemy of the bond market, and with no wage inflation one would think this to be the a reason for the lack of higher yields today, given the overall strong report.

We continue to closely watch bonds with an eye toward the ever so important line in the sand of 2.600% on the 10-year Treasury note. Our feeling is that it’s prudent to remain cautious and we are biased towards locking-in interest rates given the positive economic news that we are seeing out of both the U.S. and Europe.

Market Commentary 6/30/17

Volatility finally returned to the global bond markets, with higher international yields, sparked by the European Central Bank’s comments on market normalization. The US Fed’s comments on the necessity of raising short-term rates moved up mortgage and treasury yields. This combined with the prospect of rising European bond yields, the US bond yields touched multi-monthly highs.

We are continuing to closely watch the German 10-year Bund yield (.45%) and the U.S. 10-year yield (2.27%). If they rise above resistance at .50% and 2.30%, respectively, then yields could very likely push even higher, causing mortgage rates to most likely tick higher also.

In economic news, housing remains strong and inventories are low, which is putting pressure on home affordability. Inflation remains muted with the Federal Reserve’s favorite measure of inflation, the Personal Consumption Expenditures (PCE) Index, falling to its lowest level in months: – 1.400% year-over-year, which is well below the Fed’s 2.00% target. We have previously noted that the Fed believes low inflation is transitory and that higher wage and consumer inflation will return.

We are biased toward locking in interest rates given the chatter from both the European and US central banks.

Market Commentary 6/23/17

Rates remain near unchanged in a quiet trading week on Wall Street. The continued low levels of inflation, along with a flattening yield curve, make us wonder about the true state of the U.S. economy. A flattening yield is usually a precursor for a slowing economy. Speaking of flat, the S&P is flat for the week, oil is unchanged, and the 10-year yield is at 2.16%, also hovering near unchanged week-over-week.

Technically, the 10-year Treasury is trading just above resistance, as it has been for the past few weeks, which is why we remain biased toward floating interest rates for now.

Market Commentary 6/16/17

You might think the big economic news this week was the .25% increase in the Federal Funds Rate to a range of 1% to 1.25%, but the real news is that the Federal Reserve raised short-term rates even though there are signs that inflation is cooling. With unemployment at 4.3%, economists have been confounded as to why wage inflation has not appeared. The Fed explained their rationale for raising rates on the basis that price inflation and wage inflation will eventually make its way into the economy and that low inflation is probably temporary. Overall, inflation remains below the 2% target rate. The jury is still out whether or not the Fed’s thesis will hold true.

Psychologically, the Fed’s rate increase telegraphs its confidence an overall improvement in the US economic picture. Surprisingly, bonds rallied lower Wednesday in anticipation of this announcement with the 10-year U.S. Treasury touching its lowest level this year. Equities also traded well. Bond traders are closely watching the 2-year-to-10-year Treasury spread which continues to flatten and may be signaling a slowdown in the economy. A flattening yield curve is never a good sign, but so far the markets have not been deterred by this pattern.

In other news, May housing starts fell 5.5% from April to an annual rate of 1.092 million units, well below the 1.227 million expected. It was the lowest rate since September 2016 and the third straight month of declines. Starts are down 2.4% from May 2016. A larger drop was seen in the multi-family home sector. A slowdown in housing starts is likely to weigh on economic growth, which is good news for bonds and the continued trend of low interest rates.

We continue to watch rates and rate spreads as we advise clients on mortgage rates and remain cautiously biased toward floating interest rates given that bond yields responded well to the Federal Reserve’s decision to raise short term rates.

Market Commentary 6/9/17

Bond yields ended the week a touch higher after a wild week of political uncertainty culminating with the testimony of former FBI Director James Comey. The equity markets responded favorably as the testimony revealed a potentially inappropriate private conversation between President Trump and the former director, confirmed that the President was not under investigation, and revealed that many news outlets had been misinforming the public on the Trump-Russia connection.

Across the pond in Europe, the UK votes delivered a stunning blow to Prime Minister May and her conservative party. The vote raises the possibility of whether the Brexit negotiation should be put on hold while the British sort out their political crisis. The UK pound plummeted in response to this vote. Uncertainty typically benefits bonds and the low European rates have helped keep our rates in the U.S. low.

The idea of “buy the rumor and sell the news” held true for U.S. bonds as rates rose as fear eased this week. The next big economic event is the Federal Open Market Committee’s meeting next week. All eyes will be on what the Fed has to say about the state of the economy and on short-term interest rates.

With mortgage and treasury bonds trading close to their 200-day moving average, we remain biased toward locking in interest rates. We envision too many scenarios that could push rates higher and not enough catalysts to lower interest rates.

Market Commentary 6/2/17

Surprisingly, U.S. equities traded higher Friday morning to new all-time highs in reaction to a very poor May U.S. jobs report. Bonds also benefited from the poor report with the 10-year Treasury note touching 2.140%, breaching the 200-day moving average of 2.170%. Even though the unemployment rate fell to 4.30%, the lowest reading in 16 years, the concern within the report was the drastic slowing of new hires. The expectation for new jobs in May was 184,000 versus actual new job creation of 138,000. Finally, the labor force participation rate fell to 62.90%, and has trended near the lowest level in 30 years.

The drop in unemployment supports the belief that the U.S. economy is near full employment. Ironically, wage inflation remains flat which is one reason why bonds continue to trade attractively. The soft report supports the need for tax reform and infrastructure spending to boost job growth.

It is widely believed this report did little to change the trajectory of the Federal Reserve’s short-term interest rate forecast. The odds are very much in favor of a June quarter point (.25%) rate hike for short-term interest rates.

We continue to be biased toward locking in interest rates at these lower than expected levels.

Market Commentary 5/19/17

For the first time in quite some time, U.S. bond and equity markets showed increased volatility on the heels of President Trump’s firing of FBI Director Comey. In tandem with that, there was increased turbulence in the White House surrounding allegations of possible Trump-Russia collusion, though no hard evidence has surfaced as of yet. Investors seem less concerned with the potential conflicts with Syria and North Korea. There is a lack of certainty over the Trump administration’s ability to pass promised pro-growth tax reform. Trump’s unorthodox style came to a head on Wednesday, which saw a massive rally in bond yields and also a violent sell-off in stocks due to the aforementioned concerns. The markets traded better on Friday as this market has proven to have a short memory.

Overall, U.S. earnings were strong for the first quarter, and ultimately the stock market trades on earnings and earnings growth. The one question on everyone’s mind is how the stock market will react to the Trump administration’s actions on policies on tax cuts, deregulation, and infrastructure spending. The success or failure of tax reform will have big consequences later in the year with respect to interest rates.

With the 10-year Treasury note closing below 2.25%, we remain biased toward floating rates. We are closely watching support (2.16%) and resistance (2.61%) on the 10-year note. Breaking below or above these levels could mean much lower or much higher interest rates. For the moment, we are delighted for the positive week and better pricing for our borrowers with the drop in interest rates.

Market Commentary 5/12/17

U.S. government bonds and mortgage rates have been strengthening since yesterday afternoon and throughout today as demand for safe haven assets increased. U.S. equities closed the week out with their worst trading week in about a month.

One reason for the rally in bond yields today was the soft reporting out of the Consumer Price Index (CPI), which is a closely watched inflation indicator and measure of what consumers pay for most finished goods. The CPI index was up 0.2% in April and in line with estimates. Core CPI, which strips out food and energy data, saw a just 0.1% gain in April, a touch below the 0.2% expected. The year-over-year CPI reading slipped to 1.9% from the plus 2% that has been the norm over the past 12 months. This low trajectory of consumer inflation is good news for bonds and as evidenced by the 10-year Treasury yield closing the week out at 2.32%.

On a separate note, first-time home buyers are on the increase. The Census Bureau shows that 854,000 new-owner households were formed during the first quarter of 2017 versus the 365,000 new rental households. It’s the first time in 10 years that there were more new buyers than new renters, according to Seeing such a shift from buying a home rather than renting is a very good sign of ongoing confidence by young people in our economy. We are delighted to see that the younger generations are participating in the American dream of owning a home.

Given the strong rally today in bonds, we are biased toward floating rates as we can see rates dropping further in the short term. In the long term, the old notion of “don’t fight the Fed” must not be forgotten. The Central Bank continues to call for higher interest rates, and we feel one must be pay close attention to their commentary.

Market Commentary 5/5/17

The April jobs report confirmed continued improvement in the labor force with 211,000 new jobs created in April, above the 180,000 expected. That was well above the anemic 79,000 jobs created in March, which had been revised lower from the 98,000 originally reported.
The report’s key data findings were as follows:

* The total unemployment or the U-6 number, fell to 8.6% from 8.9%, which is the lowest rate of unemployment since November 2011.
* The unemployment rate fell to 4.4%, the lowest level in 10 years.
* Average hourly earnings rose 2.5% year-over-year as of April, compared to the recent high of 2.9% in December.
* The Labor Force Participation Rate (LFPR) edged lower to 62.9%, still at decade lows.

Overall, the report was positive given that this is the 93rd consecutive month of the economic expansion. However, wage growth rates have been anemic even as more jobs are being created and this is one reason why bonds did not sell off in response to the report. Economists continue to be perplexed by the low rate of wage growth and the general lack of inflation considering the massive amount of liquidity that has flooded the global marketplace over the course of this economic recovery.

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