The Goldilocks environment helping to fuel the rise in U.S. equities remains intact. Encouraged by an accommodative and responsive Fed, a healthy consumer, and tame inflation, the equities market grinds higher, even as some manufacturing data suggest the economy may worsen.
In other positive news, there was an announcement from the White House that “Phase One” of the China trade deal is close to being signed. Taking all of these signals into account, the threat of a recession has been removed in the near-term horizon. In fact, should equities continue to shine, bond yields may very well rise as we head into the holiday season. The consumer feels good and is spending.
Interest rates remain at near historic lows, supporting our thesis that mortgage rates should be locked at these levels. For anyone who has monitored the markets over the long-term, a 10-year Treasury yield under 2.000% is essentially free money in real terms, once inflation is factored in. Jumbo mortgage rates, which price off of the 10-year Treasury, continue to offer borrowers attractive rates even as the economy points to continued growth.
Stocks rose this week following good earnings news from America’s best companies, as well as some positive news on the China-U.S. trade issues. News can change on a dime on this issue so please take this into consideration when reading this post. While durable good orders were down slightly and the China trade conflict has created challenges for U.S. companies doing business in China, feedback from third-quarter earnings supports the slowing economy here in the U.S. and removes the recession narrative for now. Also, with over a 90% probability of a rate cut next week by the Fed, the yield curve has steepened. This is another good indicator that there is no near-term recession on the horizon and that the Fed has gotten out in front of the threat of recession.
New housing purchases slowed as interest rates rose from near-historic lows which put more pressure on borrowers to qualify. Rates are still very attractive and have definitely helped to spur purchase and refinance activity. With the 10-year now at ~1.80% from below 1.500% not too long ago, we continue to advise locking-in interest rates.
In closing, the U.S economy continues to be in a “Goldilocks” trend as inflation is muted, unemployment rates are low, and businesses are doing fairly well. Keep an eye out for results of the Fed committee meeting along with numerous other economic reports which will be trickling in next week.
A better than expected April jobs report is further evidence of the “Goldilocks scenario” that our economy continues to flourish in – albeit one that complexes many financial experts. With no near-term threat of inflation as well as improving data on productivity and manufacturing, the U.S. is experiencing the greatest recovery in many of our lifetimes. Today’s job report supported the current administration’s belief that the combination of lowered taxes and less restrictive regulation would stimulate the entrepreneurial spirit of American business owners. It is hard to argue against this position at the moment.
There were 263,000 jobs created in April, well above estimates of 180,000 to 200,000. The unemployment rate fell to an almost 50-year low at 3.60% (WOW!). With wage inflation coming in lower than expected, bonds reacted favorably to this report and stocks surged.
Setting aside the myriad of potential issues impacting the market, which include Brexit, the 2020 election, and China-US trade tension, the talk for the moment is the near-perfect market conditions of the U.S. is economy right now. As a rising stock market is a strong vote of confidence for U.S. consumption, we are seeing an increase in home buying activity as well as other financing activity. With rates still not too far off historical lows, it should be a good home buying season.
With the 10-year Treasury range-bound, we are biased toward locking in rates given the positive economic reporting and comments from the Fed this week about their concerns that inflation may be transitory.
The U.S. economy continues to chug along, at least that’s the consensus for the moment. With consumer and business sentiment still going strong, along with a recent surge in retail sales, low inflation and near full employment, the overall picture of the economy is good.
The Fed hitting the pause button earlier this year on raising rates and running off the balance sheet has certainly helped investor confidence as evidenced by the rise in equities. In addition, mortgage applications amongst other finance activities have improved due to the pause in short term rate increases by the Fed. Finally, the steeping of the yield curve has put to rest rumors of recession talk as several top bank economists see no signs of a recession, near-term.
For the moment, we are in a “Goldilocks Environment” with an economy that is neither running too hot nor too cold. As a result, the spring home buying season should be a good one.
Even as other parts of the world are experiencing a slow-down, it is hard to bet against the U.S. and all of the opportunity that this country has to offer its citizens. However, risks remain in Europe, and in our negotiations with China and North Korea, as well as the massive government debt burdens. These economic and geopolitical risks are capping our rates back home as the German 10-year Bund is trading in negative territory juxtaposed to US Treasuries which are trading above 2.50%.
Given the drift up in the 10-year U.S. Treasury from around 2.39% to 2.54%, we believe rates are range-bound. We can see rates continue to drift higher if the U.S. economy continues to stay strong and stocks continue to rise.