Economic and geopolitical news captured the headlines this week. By Friday, global equity markets rallied hard in response to the watered down Trump tariffs, as well as easing geopolitical tensions with North Korea.
The equity markets were also spurred on by a strong February jobs report (313,000 new jobs created vs. 210,000 estimated). Furthermore, December and January new jobs were revised higher by 54,000 new jobs created. While bond yields rose, yields were kept in check by wage inflation from lower than expected wage inflation data. The improvement in the Labor Force Participation Rate from 63% from 62.70% helped explain why wage inflation remains tame given that the economy is at full employment.
The European Central Bank (ECB) modified commentary regarding how it buys bonds that supports the improving economic landscape in Europe. It’s also interesting to note the delta between U.S. long-term Treasuries and the equivalent long-term German Bund. The spread on each respective 10-year government bond is now over 125 basis points. Given the positive economic news out of Europe, one may argue European bonds may rise in the near future. Back in the U.S. given the confluence of strong economic earnings, low employment, and a bullish stock market, three Fed rate hikes seem likely. All signs point to modestly higher interest rates.
While higher interest rates will make it harder for some borrowers to qualify for new home purchases and refinances, the increase in rates is attributable to positive economic forces. Housing demand remains high while housing supply is limited. Banks are eager to lend and make deals work. With little to no bad news to fall back on, we continue to see little reason to not lock in interest rates at this time, and continue to remain biased toward locking in interest rates.