The December jobs report reflected an economic slow-down, which was no surprise given the spike in the virus around the country and the shelter-in-place orders that have displaced many small businesses. The slowing jobs picture also supports more stimulus and with a democratically-controlled government, there is no doubt the printing presses will be ramping up.
The combination of massive stimulus and very low interest rates has created asset inflation (think stock market and home prices). A rise in asset values has been a great benefit to the economy and has had positive effects on spending and sentiment during these most challenging times. However, while asset inflation has boosted 401ks and home values, wage and price inflation are becoming more of a concern as inflation expectations are rising and could create tensions in the financial markets. We think this is not of immediate worry, but massive money printing does have repercussions, and if inflation runs hot, it could disrupt the equity markets and real estate markets.
The 10-year Treasury breached 1% and touched the highest levels since last March. Rising rates hurt affordability for home buyers and also make riskier assets less attractive. Don’t get us wrong – as 1% 10-year Treasury is still very attractive; it still does not discount how far bond rates have moved off their lows. Should inflation continue to trend up, rates could move up quickly and banks will be quick to reprice. We are recommending to our clients to move while interest rates remain ultra-attractive.