The highly watched Monthly Jobs Report put to rest concerns about a slowing economy as the report beat estimates with 196,000 jobs created versus 177,000 expected.
This data should put to rest for now fears on a looming recession and thus help boost stocks and slightly lower bond yields. Unemployment remained at a multi-decade low of 3.80% and hourly earnings rose to 3.20% year over year from February (which is bond-friendly as wage inflation remains tame). The Labor Force Participation Rate (LFPR) remained unchanged at 63.20%.
In other good news, the yield curve steepened. The potential flattening of the curve was a major concern just a few weeks ago, as that would be a sign of impending recession. However, a positive sloping yield curve is an indicator of a healthy outlook for the economy. Also, China and U.S. trade talks appear to be going well for the moment which has also helped stocks move higher. However, concerns remain as global economic growth has slowed in Europe, China, and Japan as central bankers continue to provide massive stimuli to their respective economies to spur growth. Finally, a Brexit deadline is looming in what is turning out to be a very complicated matter. So far, the markets have not been spooked by a no-deal Brexit, but that could change as the deadline approaches.
Here in the U.S., low rates have spurred home buying and refinances. We recommend taking advantage of the low interest environment because if the U.S. economy continues to surge, the Fed rate hike conversation will be back on the table. With this thought in mind, we remain biased toward locking-in interest rates at these very attractive levels, especially with the strong jobs report confirming no recession and the positive chatter regarding U.S. and China relations coming out of Washington.
It’s anyone’s guess how low bond yields can go with short-term government-guaranteed European and Japanese debt offering negative yields. The idea of a negative interest rate is probably something that none of us thought was possible. Bill Gross, the famed bond manager, seems to feel that something will have to give, saying, “In recent weeks markets have witnessed Mario Draghi of the European Central Bank (ECB) speak to ‘no limit’ to how low Euroland yields could be pushed – as if he were a two-time Texas Hold’em poker champion.” He then noted that in turn, Janet Yellen halted the Fed’s well-advertised tightening cycle at 25 basis points, at least temporarily, followed a few days later her counterpart at the Bank of Japan, Haruhiko Kuroda, decided to enter the “black hole of negative interest rates much like the ECB and three other European central banks.”
Domestically, U.S. bonds have benefited from these central bank policies with the 10-year Treasury trading around 1.84% as of Friday afternoon (2/5/16). A mixed job report further benefitted mortgage bonds this morning. The jobs report for January came in at less than 40,000 than predicted. However, the jobless rate did fall to less than 5%. Volatility in various sectors including global equities, the oil patch and loans made to the oil industry all continue to weigh on the market as well. These factors too are helping to push yields lower.
Though rate increases are on the horizon, experts believe the Fed will hike rates no more than four times in 2016.
Technically, bonds are overbought, and we remain biased toward locking in interest rates with yields at these levels.
Interest Rates Lowered. Excellent Refinance Opportunity.
Slow growth in 2015 now looks like no growth in 2016. The U.S. 4th quarter Gross Domestic Product (GDP) reading came in Friday morning at a very anemic .7% register with a forecast of only 2.40% for 2016. These numbers, while backward-reading, confirm some of the suspicions that both the U.S. and the world economy are slowing. Interest rates responded favorably to this poor GDP number (remember that bad news is good for bond yields) with the 10-year U.S. Treasury touching 1.94%, WOW. Bonds were further stoked by the surprise move from the Bank of Japan to move short-term interest rates into the negative in its effort to kickstart the economy by forcing banks to lend, and consumers to spend.
There was one bright spot today. The Chicago Purchasing Manger Index (PMI) reading was 55.6 reading, which indicates manufacturing expanded and is an encouraging sign for the U.S. economy.
The Fed spoke earlier in the week and announced no change in short-term interest rates. Given the poor start to 2016, most forecasters do not believe there will be another rate hike by the Fed this year. Given that the Chinese economy has slowed, the dollar continues to surge and oil has remained lower than expected, it is hard to imagine a significant rise in interest rates. The world economies seem to be addicted to low interest rates with Central Bankers willing to provide the juice needed to propel equities higher and push yields lower. How this all ends is anyone’s guess.
Given the 10-year U.S. Treasury is below 2.00%, we are biased toward recommending locking in interest rates at these levels.