A better-than-expected October Jobs Report capped off a robust week of economic news.
Positive earnings from America’s best companies for the third quarter reconfirmed that the U.S. economy remains the envy of the developed world and has the resilience to adjust to a difficult trading environment with China.
On Wednesday, the Fed lowered short-term interest rates in what may be the last of rate cuts for a while. However, the Fed’s actions the past few months have steepened the yield curve and pushed financing costs lower, helping to keep the ball rolling on economic expansion. While business investments are slowing, the job market and consumer confidence readings remain strong, and housing remains a tailwind for growth.
Across the pond, the fear of a chaotic October 31st Brexit was put to rest as well, at least for now. This is all positive for the market and potentially bad for bonds.
Capping off the week, the September Jobs Report was solid and better than expected with positive revisions to both August and September. The unemployment rate was a tick higher, up to 3.60% from 3.500%, wage inflation clocked in at 3% annually, and the Labor Force Participation Rate (LFPR) moved higher. In summary, it was a very good jobs picture for the U.S.
With so much good news to share, interest rates have been moving moderately higher, as predicted. Personally, we see no recession and can easily see the 10-year Treasury moving back up to near 2.000% given all the positive economic data recently released. Mortgage rates have been on the move as well. We continue to advise that locking-in rates at these levels is prudent, especially with interest rates still near historic lows.
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.
Easing global monetary policy continues to provide the tailwinds pushing mortgage rates lower and equity prices higher. Recent confirmation from the February PPI and CPI also confirmed that inflation remains in check. As stocks have gained back most of the losses from late last year, risk is back in vogue.
Reduced mortgage rates have arrived just in time to boost what has been a slowing new market for the new and resale housing market. Recent stories on the glut of high-end homes (those over $10 million) have brought back the conversation as to whether and when housing will reset much lower. Our view is that a glut is unlikely given the strict underwriting guidelines that banks continue to follow. If anything, the return of low-interest rates may ignite a better than expected spring buying season in housing.
However, fears remain in the highly leveraged first world economies, especially in the corporate and government debt markets. As previously mentioned, QE has created absurdly low rates around the world and true price discovery is difficult to attain. Geopolitical events such as China trade talks, Brexit, and Italian debt levels are also worrisome, as well as the slowing of the global economy. Low rates work as a tonic in addressing these issues and central banks realize that.
With the 10-year Treasury dipping below 2.600%, locking is not a bad idea. However, given where European and Japanese bonds are trading, rates in the U.S. may go lower. Be careful what your wish for, as lower rates may mean trouble ahead. For now, all looks to be OK and borrower appear to be taking advantage of renewed low rates for both purchases and refinance. We continue to be cautious and are biased on locking-in interest rates at these levels.
The highly watched monthly non-farms payroll report was a bit of shocker at first blush with only 20k new jobs created in February versus economists’ estimates of 180k jobs. However, other details within the jobs report were positive with the unemployment rate dropping to 3.8% and a decline in the U-6 number (total unemployed) falling to 7.3% from 8.1%, which was the largest decline ever. The Labor Force Participation Rate (LFPR) remained unchanged at 63.2%. We will await revisions on this month’s report to see if the new jobs created are revised higher. Our hunch is that there were more jobs created then stated in this report as evidenced by the bond market’s muted reaction to the report. Stocks initially sold off but recovered most of the losses by day’s end.
Other big news this week was concerns over Europe and China’s slowing economy and the ECB reinstating stimulus. We are concerned about how long the U.S. can expand its economy in the face of global economic deceleration. Global bond yields have fallen again, and the Fed has also stalled on normalizing monetary policy which has capped interest rates globally for the moment. The fear is that with rates already so low (many bonds yield negative rates in Europe and Japan), central bankers have limited tools to in their toolkit to deploy should the world economy slow further. Keep an eye on the flattening yield curve in the U.S., especially the short-term treasury bills to 10-year Treasury spread. While a flattening yield curve does not mean a recession is near, an inversion of the yield curve is an ominous sign and has often properly predicted a recession.
Not all of this gloom and doom is bad for the consumer, as low-interest rates have spurred home refinances and purchases of both commercial and residential real estate. With home prices dipping a bit, it appears as if sales are starting to pick up into the spring buying season.
Given that the 10-year Treasury yield is below 2.62%, we remain biased toward locking-in interest rates, especially on purchase transactions.
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.