Todays Employment Report and Interest Rates!

My normal pessimism has really been assaulted over the past month!

It would appear.... just maybe.... cross your fingers... that the Fed has managed to do it again.

Todays employment report showed 78K new jobs added in May. That was 100K less than the consensus projection. But still... the rate of job growth over the past 5 months would show job growth of close to 2 million a year. Pretty strong.... but not so strong as to really push wage based inflation. This has been shown in the employment costs numbers as well. The overall unemployment rate is now 5.1%. That is a VERY strong number!

We have seen some tapering off of inflation pressures while at the same time GDP growth has slowly slid back to realistic and sustainable 3% - 3.5%.

Most analyst now predict one and perhaps two more .25% increases by the Fed before they stand pat at around 3.5% on the Fed funds.

The bond market is roaring on all this. 10 year bond yields are now around 3.85% and even short maturities are seeing decreasing yields! Housing bubble? Forget about it! Housing is going to boom with the incredibly low interest rates. I will be offering clients 30 year fixed rate mortgages at 5% today with no discount points and if the market rallies any further it will be under 5%!

If the Fed really has succeeded in orchestrating a solid and long term sustainable 3.5% fed funds rate, long bond yields in the 4% range, 3.5% GDP growth and inflation contained at under 3%...... WOW! Great job and things may look rosy for a good while! Then again I may be irrationally exuberant!



Terry


The only fly in the ointment? The stupid Govt. is so addicted to spending that the growing deficits will continue to dump so much supply on the bond market that it will exceed demand push rates up thus wrecking this nice equilibrium we are have now.

 

Scott,

The Fed Funds rate has nothing to do directly with mortgage rates (clearly).

In 1999 the Fed Funds rate was something like 6% and mortgage rates were around 6.5%. In that context, todays comparison does not look so crazy.

The bond market moves largely in anticipation of future inflation. That is tied to economic growth. If inflation appears to be tapering to perhaps a 2.5% or so rate coupled with sustained GDP growth of something around 3.5% then 10 year bond yields in the 4% range with a Fed Funds rate of 3.5% - 4% are not out of whack.

It would appear that this sort of scenario may be emerging. If so, the interest rate picture looks pretty rosy.

Also, your numbers are not exactly right. Back in March and April of 2004 30 year fixed rates were in the 5.5% - 6% range. They then increased to as high as 6.5% during 2004 and into early 2005 as inflation fears rose. But since then, it appears that GDP growth has slowed to a more reasonable level and inflation data appears to show less ongoing pressures there as well. That coupled with full employment (yet without dangerous wage inflation) means that the Fed will soon be done. So, the bond market has no need to price in ongoing Fed increases....



Terry

 

No idea. I have never messed around with CDs. The yields are just too low I cannot see them making much sense.

The 6 month libor bond is yielding about 3.1%. Isnt that better than a 6 month CD? I have always found that cooresponding term high grade bonds offered better yields than a CD. YMMV.


Terry