Interpretations of this week’s events are all over the lot, so before adding to the confusion, a few bare facts with opinion sandwiched between.
The U.S. 10-year T-note began 2015 at 2.23% and promptly dropped to 1.65% in February; by mid-March back to 2.23%, then stable near 1.90% for six weeks — and in the last ten days blew back to 2.23%. Mortgages are less volatile than 10s, but tracked in a range 3.75% to 4.00%. That trading is a bottoming pattern. The end to a 15-month straight-line downtrend. And anticipatory to Fed liftoff, whether summer or fall or whenever.
Today the all-important monthly payroll report brought an April gain of 223,000 jobs. The consensus seems reassured, seeing a rebound after a lousy winter. But, in the rest of the report: March was revised from a poor 126,000-gain to only 85,000. April unemployment stayed the same 5.4%, as did the 6.6 million “involuntary part-time.” The average work week and overtime slid, as did hourly wage growth, up only $0.03 to $24.87, just 0.01%, less than half the year-over-year trend at 2.2%.
That result should not reassure anyone. The bad-winter argument was phony to begin with and is now annoying.
The Institute for Supply Management (ISM) service-sector survey for April rose to 57.8 from an already high 56.5. This sector includes most of IT, and if you’re in IT you’re hot! The economy may not be accelerating, but many parts are just fine, thanks.
The U.S. trade deficit in March was expected to rise from February’s $35.4 billion to $42 billion. Instead it gapped to $51.4 billion. One explanation: an LA port strike was settled, unloading a mass of previously floating imports. Still, the collapse in oil imports requires a lot of sneakers to offset. Another explanation for the import surge and economic softness: the outside world devalued against the dollar last year, roughly 20%.
In the old days, before there were electrons, global trade took a long time to adjust to currency manipulation, and then to re-adjust currencies to changed trade. Back in the days of inflexible production lines and inventories, global supply chains worked like 10,000 miles of elephants, trunks holding tails. Each leg of currency/trade adjustment took a couple of years to play out. Now? Mouse-clicks at light speed.
The last year’s currency events is crucial to understanding: the dollar roared up because the Fed intended to lift off simultaneous with other central banks’ opposite easing by last-ditch QE. Then, the currency move plus QE forced down long-term rates everywhere. That whole process overshot, and now has rebounded. The euro fell from $1.40 last year to $1.05 in March, now back to $1.12.
And the overshoot in international bonds has been spectacular. Europe is showing signs of life, which one would sure as hell expect after a 30% devaluation. At the beginning of 2015 the German 10-year traded at 0.50%. At the onset of European Central Bank (ECB) QE in March its yield fell to 0.05%. In the last week it rebounded to 0.55%.
Right or wrong, global credit markets — interest rates — are now beginning to price-in the probability of economic recovery and withdrawal by central banks.
They are also pricing-in volatility. Liftoff first by the Fed, and then withdrawal elsewhere is going to be disorderly. The Fed has been at zero for seven years. A new generation of kids at trading screens, algorithms running brightly and then insanely… neither the kids, the algorithms, nor their parents experienced with what’s coming.
Be very careful floating a mortgage rate right now
There are many volatility-scare stories circulating, but I’m a disbeliever. We’re just headed for old-time volatility, maybe magnified by regulation thinning markets. Not sure about that. But for sure, this: on Thursday on its way to settling at 0.57%, the yield on the German 10-year ran to 0.786% and back. One day! And maybe this: some sources show the U.S. 10-year flickering up to 2.42% Thursday, then back to 2.23%.
Be very careful floating a mortgage rate, now. And no regrets if you catch a spike — super-spikes and vees are likely to be common during the new age of liftoff.
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