Positive comments about trade negotiations with China from the White House on Thursday and Friday sent the equity markets on a tear at the expense of bonds. Rates rose as optimism for a trade deal increased. The markets seem to think at least a partial trade deal may be in the works this time. If a deal is inked, it will be an ongoing positive for stocks and will certainly push interest rates higher.
Earlier in the week, the Fed Chairman spoke about his committee’s view on the economy. While the Fed sees the economy slowing, for the moment there are no signs of a recession on the horizon. The Fed reiterated it will do whatever necessary to keep the economic expansion going.
Mortgage rates have also risen this week. As we have written previously, our position continues to be that loans should be locked in when the 10-year Treasury is below 2.00%. We continue to hold this view, especially as the 10-year Treasury yield has moved off of 1.500% and is trading near 1.800%.
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.