The U.S. economy grew at the best clip in almost a decade even in the face of a slowing global economy, China-US trade tensions, and political uncertainty in Europe. The strong job market and tax reform helped spur consumer spending and on-going positive business investment. Fourth quarter GDP closed the year out at 2.6%. With the White House gunning for 3% economic growth and the Fed pausing on interest rate hikes, the good times look likely to roll on at least for a while.
Further supporting keeping interest rates on hold was the Fed’s favorite measure of inflation, Personal Consumption Expenditure (PCE), which came in at 1.9%, as expected. Low inflation readings cap bond yields and force investors to invest in riskier but higher-yielding assets classes.
Stocks continue to climb the wall of worry and are re-approaching all-time highs. Market risk-taking is back in vogue even in the face of a decline in earnings. A return to low rates has triggered increases in mortgage refinances and have certainly helped on-the-fence home buyers jump into the housing market.
With Europe and China slowing, and the Fed being very careful about its next move, we can see interest rates remaining low for the next several months. With the 10-year Treasury yield under 2.67%, we advise locking rates except for those borrowers willing to play the market in search of a marginally better deal.
U.S. Treasuries and major equity markets continue to trade benevolently as investors adjust to a more a “risk on” environment. A December wash-out in stocks and subsequent dovish commentary out of the Fed stoked this move upward in stocks and a move downward in interest rates. For the moment, Mr. Market has moved aside global growth concerns, some weak earnings guidance from analysts, and the fear of Brexit and Italian bond defaults. Positive talks with China are encouraging and have helped ease the markets. No less important is the fact that low interest rates spur risk-taking in equities and have arrived just in time for the spring buying season. Refinance volume has also improved amongst other debt-related activities.
The Fed pausing on their rate hike forecasts does raise some concerns given the supposed strength of our economy and near all-time highs in the stock market. Historically, the Fed mandate was to watch over employment and inflation, but it is clear that supporting equity and asset valuations is no less important in today’s world. Low rates have probably distorted true price discovery and the Fed will need to be very careful about how to move rates as December’s vicious stock market decline is evidence of what one misstep can bring on.
Next week will be an important week for Fed-related news. We believe they will be very careful with policy statements and promote their “patience” policy to Congress.
We are grateful for the low interest rates and continue to advise clients to be cautious with respect to floating rates. One quickly forgets how fast stocks and bonds can move against you should the market have a change of heart. A 10-year U.S. Treasury bond trading under 2.700% was not forecasted by many this time last year.
U.S. equities traded well again this week in response to positive headlines that China and the U.S. will continue to negotiate tariffs, as well as the anticipation of an agreement on a new spending bill which will be signed today, and tame inflation readings. Even with some concerns about slowing global earnings growth, the threat of a global slowdown and or recession, and a poor reading of domestic retail sales for the fourth quarter, for the moment equities continue to push these worries aside. We think a lot of the excitement about equities has to do with the Fed’s pause in both rate hikes and balance sheet reduction. Risk on trading is now in full effect as market participation works under the assumption short-term interest rates will remain low both domestically and abroad. Home buyers are returning to the marketplace enticed by low interest rates and price declines. By all accounts, the U.S. economy is robust as mortgage applications rebound and consumers continue to feel good about their future prospects. With bonds, too much good news is bad, and we continue to feel compelled to advise clients that with the 10-year Treasury under 2.700%, we believe locking-in is advisable.
Global yields continue to move lower benefitting borrowers in a significant way. Domestically, the so-called “Powell Put” has helped equities rise as traders have greater confidence in bidding on riskier investments.
The 10-year Treasury is trading under 2.65% which is making mortgage rates ultra attractive again and from what we can see, increased loan volume greatly. While our domestic rates are low, rates are even lower across the pond. In fact, there are hints that the European Central Bank might soon lower short rates in the face of a slowing European economy, Brexit confusion, and looming Italian debt concerns. Add a deflationary Japan and a slowing China economy to the mix, and therein lies the reason our domestic rates while low are actually quite high in relation to the rest of the developed world.
No big economic news this week, but next week will be important with multiple inflation reports coming out. If inflation remains tame, we could see rates move lower. Should we get a surprise higher on inflation, rates will adjust quickly. The Fed calmed markets late last month as they confirmed rates increases and the Fed balance sheet reduction was not on auto-pilot. A hot inflation reading could challenge those statements, especially with a booming U.S. economy, and historically low unemployment.
Home buyers are taking advantage of these low rates, and with a drop in home prices, we are seeing greater activity from buyers. We remain biased toward locking-in rates at these low levels (to be fair, levels we thought we would not revisit again for quite some time).
Bonds have been on a tear as rates have dropped in response to a variety of factors including a very volatile December for equities, a slowing global economy, Brexit, Italian debt fears, trade tensions with China, and dysfunctional political system in Washington.
The Fed this week confirmed that it will continue to be data-dependent and that monetary policy is not just simply running on auto-pilot. This was positive for both equities and those relying on debt financing.
On Wednesday, the Fed chose to keep overnight lending rates at current levels and also opined on the direction of the Fed draw down its balance sheet, also known as Quantitative Tightening (QT), as well as future rate hikes. A few months ago, most economists had three rate hikes forecasted for 2019, now, the consensus is for probably only one rate hike. All of this has pushed the 10-year Treasury yield (the benchmark lending rate to under 2.75%) which has helped increase mortgage applications, amongst other requests for credit.
The widely watched monthly jobs report did not disappoint and pushed up yields a touch this morning. The report was very positive with 304,000 jobs created in January. The unemployment rate ticked up to 4%, but so did the Labor Force Participation Rate (LFPR). Three-month average job creation is running at 240,000 jobs per month, a very strong number. During the Obama presidency, many economists though numbers like this would be unattainable this late into an economic expansion. Wage inflation remains in check (as do other inflation readings). Geopolitical concerns have taken a back seat to the resilient domestic economy for now. The U.S. equities market snapped back from an awful December with the strongest January in years. Historically low rates are still in play along with strong U.S employment and positive earnings from many big companies.
It is worth noting that some consumer confidence readings have slipped and how this will play out may not be felt for several months in the economic readings.
With rates on the rise after this strong jobs report, we believe it is prudent to strongly consider locking-in interest rates at these levels.
Government, investment grade, and mortgage rates remain low amidst uncertainty over the government shutdown, China trade negotiations, the Brexit outcome, and overall concern about a slowing global economy. As stated previously, Wall Street likes gridlock so it is no surprise to see U.S. equities rise in the face of a government shut down. Furthermore, the Fed has been fairly clear that we may be closer to the neutral rate of interest than previously thought, as well as slowing the reduction of the balance sheet which has been draining liquidity out of the financial system. These measures have served as a boon to equities.
Low rates have helped mortgage applications. Home sales have slowed which has forced some re-pricing that has benefited many who have waited for a break in the upward trend in housing prices.
With interest rates on the 10-year Treasury note under 2.800%, we remain cautious and are biased toward locking in interest rates at these levels. Should the government open and should we see more positive discussions on the China trade negotiations, we believe rates may move higher and possibly, very quickly.
The effects of the partial government shutdown
Interest rates are drifting higher as the damage caused by last month’s brutal volatility washes out and the focus returns back to earnings, the economy, global trade, and inflation.
We will learn more about earnings in the coming weeks, but it has been a mixed bag so far. With respect to the economy, the U.S. economy remains strong, but across the pond, Europe’s economy appears to be slowing along with China. The global economic slowdown is a big concern and is partly responsible for the drop in interest rates that took hold late last year and continued into 2019. Counteractively, a slowing economy could be good for stocks as it will keep the Fed from raising rates.
Secondly, the effects of the government shutdown (if it continues), will become a drag on future confidence readings and overall GDP if it’s not resolved soon. However, keep in mind, Wall Street loves political gridlock and the surge in the stock market is evidence of this.
Thirdly, there are rumors that the U.S. and China are working together on a trade deal. Stocks are higher on this news and bonds have sold off a touch as the risk of an all-out trade war subside.
Finally, inflation remains in check even with full employment here in the U.S. This is a big positive for bond yields along with the Fed clearly stating their intention to remain patient.
With the recent upward trend in stocks, and, the 10-year Treasury Bond trading below 2.80% yield, we remain biased toward locking-in interest rates given recent events.
After a gloomy start to the week, U.S. equities rallied significantly to the delight of traders and investors. While the equity markets are poised to close lower for the year, a strong rally on the day after Christmas stock rally and a follow up positive close took some risk off the table with respect to if “Mr. Market knew something the rest of us didn’t”. Part of the recent volatility can be attributed to year-end tax selling, but the violent moves appear to be the result computer-driven algorithmic trading. Volatility is usually a benefit to bonds, and given the strong economic data and low unemployment rates throughout the year, we are glad to report the 10-year Treasury is well under 2.82%. Around the developed world, interest rates remain accommodative as both China’s and Europe’s economy show signs of slowing. Whether or not a recession is on the horizon is debatable, but low rates appear to be needed to keep the global economy moving forward.
With inflation in check, a volatile stock market, the threat of ongoing trade tensions with China, as well as a partial government shutdown, we see interest rates remaining low for the first few months of the year. This reprieve in interest rates should be a boon for home buyers who were worried about rising interest rates and a slowing housing market. Banks are fighting hard for home loans and we look forward to helping our borrowers and referral partners in the coming year find the best loan they can.