Category: Market Trends

The May jobs report surprised the markets on the downside. Non-farm payrolls rose by only 38,000 jobs in May, which was well below the 155,000 expected. This is the lowest jobs number since September 2010. While the unemployment rate declined to 4.70%, the actual employment numbers were weak.

The Labor Force Participation Rate (LFPR) was the key in the unemployment rate, which fell to a four-decade low of 62.60%. The LFPR is the percentage of working-age persons in an economy who are employed or are unemployed but looking for a job.

The big takeaway from this report is that the odds of June rate hike are probably completely off the table.

The U.S. bond markets responded positively (as expected) to this poor jobs number. Both short-term and long-term bond yields are rallying hard this morning with the 10-year U.S. Treasury trading at around 1.700%.

With interest rates trending this low again, we remain biased toward locking in interest rates at this time. However, we would be surprised if interest rates went lower after this very poor jobs report.

Trading is light today in advance of the long Memorial Day weekend. In economic news, the first quarter second reading of GDP rose to .8% from the first reading of .5%, which is lower than the expected .9%. This new reading, though a slight improvement, is still weak. On the housing front, home sales climbed in April to the highest level in 10 years. This is a good sign that the housing market is gaining momentum propelled by steady-as-she-goes job creation coupled with low interest rates. This is positive news for mortgage professionals, as well as for appliance manufacturers and home builders.

June will be an interesting month for the bond and equity markets as there has been some hint from the Federal Reserve that a rate increase in short-term interest rates is now on the table. We will be watching how this news affects these respective markets later in the month. One negative effect of the recent Fed-speak on short-term interest rates is a flattening of the yield curve. This has put some pressure on the shorter end of the yield curve, while the long end of the curve has not risen much. Still, interest rates remain attractive regardless of the flattening of the yield curve.

It’s important to monitor the yield curve because it serves as a benchmark for all mortgage and lending rates.

At the moment, our bias is toward cautiously floating interest rates into the month of June, with a watchful eye on the markets.

The latest reports show very low inflation. The Producer Price Index (PPI) rose just .2% in April over March which was less than the .3% expected. With inflation pressure light, interest rates should remain low in the U.S. in the near term. Abroad, specifically in Asia and Europe, central bank stimulus programs have continued and poor economic reports will also suppress global interest rates. Collectively, all these data points translate into lower interest rates over the long haul, which hurts savers but helps speculators, investors, and stock pickers.

It would seem like a no-brainer to lock in interest rates with the 10-year U.S. Treasury Note trading at ~ 1.730%, but many experts believe U.S. interest rates will decrease even further.  Some economists fear that the U.S. economy is beginning to resemble Japan’s with low growth, low yields, and weak demand. Even with the prospects of potentially lower yields, we continue to be biased toward locking in interest rates at these exceptionally low levels.

The April jobs report was weak with the U.S. adding only 160,000 jobs against predictions of over 200,000 new jobs. But much to the surprise of experts, the U.S. bond market did not see lower interest rates as a result of this soft report.  This weak report will make it hard for the Federal Reserve to raise interest rates at their next meeting and rates may stay low for longer (good for new home buyers, but bad for savers).

On a related note, Jeffrey Gundlach, the widely followed “bond guru,” openly criticized negative interest rates this week saying that this central bank easing policy is akin to deflation. He, like many, feels that negative interest rates are a bad monetary tool and should be phased out. 

Focusing in on the mortgage market, we continue to remain biased toward locking in interest rates at the current levels. Interest rates are low and given that the weak job report in April did not further reduce mortgage rates, we don’t believe floating interest rates on new transactions is wise.

Equity markets closed out the week lower with the worst weekly sell-off since the earlier part of the year. Here in the U.S., the Federal Open Market Committee prepared statements that continue to ensure low interest rates. With inflation tame and anemic global economic growth, the chances for a June rate hike are currently pegged at 15%. The U.S. economy is performing well in some respects but continues to struggle in others. By the Fed’s own assessment, growth and consumer spending have slowed despite gains in income and employment and a strong housing market.

Mortgage interest rates remain attractive with the 10-year Treasury Note trading at 1.83%. As previously stated, we continue to be biased toward locking in interest rates with rates this low, with the awareness that interest rates could go lower given all of the economic and political uncertainty.

There was not much to report on the economic front this past week with most of the reporting focused on inflation. Inflation remains tame as evidenced by the Consumer Price Index (CPI) report released this past Thursday. The March Consumer Price Index (CPI) rose 0.1%, below the 0.3% expected. The Core rate, which strips out volatile food and energy, also rose by 0.1%, below the 0.2% estimated. Gas prices were higher last month, offset by lower costs for clothing, furniture and used cars, while the cost for housing, medical care, and cigarettes edged higher. Stocks continue to trade well and have gained back all of their losses from the beginning of the year.

The unintended consequences of negative interest rates have been front page news with the German 10-year bund reaching zero yield. Negative interest rates are challenging for pension funds and insurance companies. The inability to return adequate returns is forcing some European insurance companies to raise additional capital. Where this all leads to should be interesting as the prospect of negative rates is real and will force investors into buying riskier assets.

Here in the U.S., interest rates remain at historical lows. However, even given the higher yields in the U.S. versus countries such Germany or Japan, and the potential for our interest rates to go lower, we remain biased toward locking in interest rates at these low levels.

There’s not much to report this week by way of economic news. Interest rates globally remain at historical lows with the German 10-year bund nearly approaching zero earlier this week. Here in the U.S., interest rates remain very attractive.

On Thursday, Fed Chair Janet Yellen expressed her belief that the U.S. economy remains on solid ground and that the Fed may raise short-term interest rates later this year. Technically, mortgage bonds are near the 52-week highs and the 10-year Treasury Bond continues to trade well with a current yield of 1.71%. Though it’s possible interest rates could decline further, we are biased toward locking in interest rates at these levels.

Each new first week of the month brings us the U.S. jobs report, and this week brings good news.  New job creations came in a touch above expectations with 215,000 jobs created in March, above the 200,000 expected.

Within the report, the unemployment rate rose to 5% from 4.9%, the U6 number was 9.8% from 9.7%, and the Labor Force Participation Rate (LFPR) rose to 63% for the first time in two years.  The uptick in both unemployment and LFPR was a result of more people entering the labor force, but unable to find a job.

On a macro level, experts are debating how long can the U.S. be insulated from and continue to outperform the rest of the world.  The resiliency of the U.S. consumer and economy is second-to-none, but, in our highly interconnected world, it’s plausible to think the U.S. could experience some road bumps later in the year.  It’s open to debate how bonds and interest rates will react. There are also questions as to which tools the world’s central bankers can use to effectively stimulate the global economy.

U.S. bonds continued to trade well this week as seen by the 10-year treasury note current yield, currently <1.800%.  Technically, 30-year mortgage bonds are trading at resistance levels and we would not be surprised if interest rates moved higher in the U.S. given the ongoing positive economic data we’re seeing.

The Federal Reserve dialed back its outlook on the economy this past week and stated that they are unlikely to raise interest rates more than twice in 2016. Short-term interest rates were left untouched, which stoked the stock market and also led to lower yields on both the 2- and 10-year Treasury notes.

The challenge for the Fed is trying to balance these disparate elements: an anemic economic recovery, an improving job market (though with not much wage growth), and the ongoing global economic uncertainty.

With the stock market experiencing several good weeks of trading, the fear of a recession has diminished. Low-to-negative interest rates have further increased risk-taking. The 10-year Treasury note continues to trade well below 2.00% at 1.890%.

Technically, mortgage bonds continue to trade against resistance and we are biased towards floating interest rates at these levels. We are vigilantly watching the 2-year and 10-year Treasury note in the event that interest rates suddenly rise.

U.S. bonds yields continue to rise in response to positive economic data coming out of the U.S. along with a reinvigorated stock market and rallying oil. The 10-year U.S. Treasury yield, which is the benchmark for bonds, is now near 2% as global economic fears have subsided.

There was not much in terms of economic reporting this week. The big news came out of the European Central Bank (ECB), which announced increased economic stimulus to fend off deflation and to spur their economy.

All eyes will be on the Federal Reserve next week and on the outcome from the Federal Open Market Committee’s meeting. The feeling is the comments out of the Fed meeting will be hawkish, which is bad for bonds.

Technically, we are advising with caution to float interest rates and we are monitoring the 10-year note carefully to see if it edges beyond the psychological 2.00% barrier.