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.