A bizarre sequence of events and data has taken bond and mortgage yields to their lows of the year, the 10-year T-note 2.58% and mortgages near 4.50%.
Ukraine is the largest immediate force pushing down on rates, but we’ll review that after trying to make sense of the most contradictory steam of economic data in a long time. 1st quarter GDP on Wednesday looked like the onset of recession; the Fed’s same-day post-meeting minutes had an other-worldly calm; and the April employment report on the surface boomed.
A foreword on data. Many civilians regard economic data as books baked by conspirators. Too many professionals support this cynicism in their sales pitches. Donāt believe any of that: the agencies compiling data do the best they can. When the numbers look as crazy as the following, we are either beyond our ability to describe our economy, or the economy has departed its prior patterns, or both. Today, both. A third thicket for civilians: the professional spinners, 90% of them sunshine boys.
GDP rose only 0.1% annualized in the first 90 days of 2014, and were it not for Obama Care sign-ups boosting “services consumption” would have shrunk more than a point. The Affordable Care Act “consumption” of course acts more like a tax. The usual suspects dismissed the quarter as bad weather, including a 7.6% tank in exports. That’s not weather; that’s the whole fool world trying simultaneously to export its way out of trouble.
It was a rotten 90 days, but temporarily below-trend, not pre-recession. The ISM manufacturing survey has been stable in the low 50s all through 2014. But the GDP report confirmed one persistent flaw in the economy: incomes are losing ground even to very low inflation. The BLS Employment Cost Index rose 0.3% in the first quarter, the worst performance since stats began in 1980.
Enter the monthly payroll report. 288,000 net-new jobs! Unemployment to 6.3%! Nobody outside the stock market or White House believes either number. You’d think there was a way to know for sure how many people are at work, or not, but the devil is in seasonal adjustment. So, look to several-month averages, which leads so many analysts to smile wisely, note almost 200,000 new jobs monthly and announce, “The economy is slowly healing.”
I wish I had one of those guys nearby to strangle, slowly. Look to long-term averages, but also crossfoot disparate reports for confirmation. Buried in the payroll figure: average hourly earnings in this booming April roseā¦ zero. Zip, zed.
Theory holds that as any pool of available labor shrinks, employers will compete by paying higher wages. Today’s pool is global. Oceanic. Workers still are competing with each other to find jobs and accepting poor pay. Not the compressive gouging by employers 100 years ago, just electron-greased global substitution. Slowly healing? “Another few years in that wheelchair and we’ll have you on crutches!”
Interest rates are going to stay down until wages turn, if only because inflation cannot move up, out of this too-low danger zone until wages rise.
Ukraine. Markets for months have assumed that Ukraine will be mostly or completely absorbed by Vladimir. Alarm has returned to markets only upon combat, no matter how inevitable the outcome for Ukraine. Serious sanctions would also have effect, but they are even less likely than Ukraine’s survival.
History marks today’s dilemma. Never promise to defend a place if you can’t. That only emboldens futile resistance (Budapest ’56, Prague ’68), or gets something big going (Poland ’39). On the other hand, feeding pieces of your neighbors to the barbarian du jour can leave you alone on the menu, and Ukraine more resembles 1938 than any situation since.
Mr. Obama and Ms. Merkel have been the least-active pair of Free World leaders since the big war, tempting adversaries to interpret restraint as weakness. A John McCain spasm would be wrong, but how to demonstrate resolve? Baseballers call this a “tough chance.” Although restraint is right, watching Ukraine go down is terrible.
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Ā Today’s trading, 10-year T-note. How do we know that Ukraine is more important than a boom in payrolls? On release of the job data the 10-year took off — it had been bid down since the GDP numbers Wednesday, traders hoping for a weak job report. As soon as news of combat in Ukraineā¦ 10s broke to the 2014 low. Click on the charts to enlarge.
10-year T-note in the last six monthsā¦ the low today is marginal, more a “Friday effect” than breakthrough. Big investors of all kinds buying bonds for safety before the weekend are likely to unload on Monday if Ukraine gets no worse, rates back up.
Healing?
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