U.S. Treasury bonds sold-off heavily Friday afternoon in response to a strong October Jobs Report and hints from President Trump that the U.S. and China are discussing a potential resolution on tariff and trade negotiations which would be welcomed news for the global markets.
In economic news, the 250,000 new jobs created in October were well above estimates. However, the troubling part of the report for bonds was the year-over-year wage growth which rose 3.10%, the highest rise since September 2009. The rate of unemployment remained at a 49-year low of 3.7% and the Labor Force Participation Rate rose 62.9 from 62.7. All we can say is this was a very good report and that the U.S. jobs market is on strong footing. Business confidence is sky high.
Should we see a pattern of higher wage inflation in future reports, we would think the Fed would continue to carefully raise short-term interest rates given that the economy is very near full unemployment and that inflation has returned to the targeted 2% range and possibly moving higher.
The equity market acted better this week as volatility subsided. Bond yields trended higher with the ever important 10-year Treasury bond closing out the week at 3.22%. We usually don’t speak about politics but next weeks mid-term elections have been the most passionate we have seen in years. Bonds could react differently depending on how the voting shakes out.
Given that bonds were not able to break lower during the last couple of weeks, even in a brutal trading environment, we remain cautious on interest rates and continue to advise clients to lock-in what are still favorable interest rates.