The Jobs Report was released today and on the surface it was a bit of a letdown.  With only 148,000 new jobs created last month, the news momentarily squashed the felt euphoria from the flurry of cheerful data released so far this week.  I’m here to tell you that the celebration can continue and here’s why: The average rate at which jobs have been created in the U.S. is 210,000 per month, and there have been over two million new jobs created every year for the last seven years! There are about 124 million people working full time in the U.S., and our population is growing at a rate of only 0.7% per year, so the 1.6% rate of new employment opportunities outpaces population growth by 2X.  And that means that employers have to pay more to attract the help, which is one reason that wages increased by 2.5% last year alone.  So if you are willing and able to work, that’s good news.

All that comes at a cost, however, and that will be higher interest rates in the future.  With the Fed raising three times in 2017 and committing to three more in 2018, those in the know are forecasting the 30 year rates to end the year about 1/2% higher than present levels, which are still pretty attractive.

It’s been seven years since policymakers started using the term “transitory” to describe the period of low interest rates that we are still experiencing.  Rates have been held low in part because inflation remains near zero.  This morning, Personal Consumption Expenditures dropped again to a 1.3% increase.  That means that we are only spending 1.3% more for our personal effects this year than last year.  While personally I think it’s great that my paycheck doesn’t feel quite as tightly stretched to cover costs of living, others feel that we need to be seeing a 2-3% annual increase in the price of goods and services to maintain a healthy economy. Those expositions are coming from the very body that regulates interest rates, but perhaps that argument is fundamentally flawed, given the advances made in the sectors that make all that stuff.

Attempting to figure out the future of our evolving world economy, there is a hypothesis which argues that technology has driven down, and will continue to drive down the cost of goods and services.  The price increases that we have experienced in the past are irrelevant moving forward because the way we make and consume things has changed. It has been estimated that 38% of American Jobs are at high risk of being replaced by robots (or other artificial intelligence) over the next 15 years.  Robots currently account for about 10% of all tasks performed in the manufacturing sector.  That number is anticipated to rise to 25% in the next eight years alone.  Increased automation of course has its advantages, one of them being a productivity gain of 32% in the last 14 years.  That expansion of output has brought more goods and services to the market, which means more supply, which drives down prices.  And while I love getting good quality stuff at a great price, I also recognize that without a job, I can’t buy anything.
               

It’s Fed Day. The markets are flat ahead of the read statement at about 12:15 our time.  Their economic projections (AKA: “dot plot”) will be publicized, as will be the Fed Funds Rate going forward.  The latter is anticipated to remain at 1.25%.  Many economists are expecting the Fed to announce the implementation of the plan laid out earlier this year to sell off the better part of $4.5 trillion in assets (AKA: unwinding QE).  While the markets are anticipating this flood of bonds to hit the market, it’s entirely possible that the ramifications will have hurricane-like destructive effects on interest rates, just as a real hurricane destroys the property of people, even though they know it’s coming.

Puerto Rico’s Governor told residents that their lives are in danger if they don’t evacuate.  I’m telling you that if your mortgage interest rate isn’t locked in and fixed, your financial life is in jeopardy. 

Just like that, school is back in session.  It was a great summer vacation!  Our family did a lot of fun things and I enjoyed sleeping in on a regular basis, staying up late, and relaxing a lot more.  But now it’s time to get back on a schedule.  It’s also time to pay the credit card bill for all the back-to-school shopping that was required to get four boys outfitted for learning.  As a nation, our back-to-school spending will hit $83.6 billion this year, a marked increase from last year’s $75.8 billion in clothes, shoes, pencils, and paper.

Mortgage bonds are trading sideways, keeping interest rates steady.  

With my parents coming into town last night and Monday being Pioneer Day, I am trying to stretch this upcoming weekend into a four day celebration by working extra hard today.  Hence the early delivery of this week’s commentary.

Stock indices hit more all-time-highs yesterday, and yet, interest rates haven’t seemed to notice.  Typically, interest rates rise with the stock market.  But the more the free market relies on sovereign intervention as normalcy, the more that pattern is disrupted, making it increasingly difficult to forecast with any degree of accuracy the future of interest rates.

That challenge is not localized to my tiny office either; faced with the challenge to liquidate $4 trillion in marketable securities, even the Federal Reserve Banks seem to be scratching their heads as to how and when to pull the drain plug.  It could be as early as September, but it might not be?  Across the pond, the European Central Bank President is facing similar circumstances.  Mr. Draghi commented this morning that in spite of a strengthening economy, prices have flat-lined, requiring a continuing period of “highly accomodative” interest rates.  So for now, we consumers continue to benefit from cheap financing.

Happy Pioneer Day! 

There are seven million people in this country who are officially “unemployed”.  The Unemployment Rate ratcheted up a tenth to 4.4% this morning, even though the BLS Jobs Report shows that there were 43,000 more jobs created than had been expected.  That seems erroneous at first glance until you see that 361,000 people entered the workforce but only 245,000 jobs were created.

Now look at the same report which shows that 69% of men and 57% of women who are eligible to be employed are actually in the workforce.  That’s an average Labor Participation Rate of 62.8%, which is well under what the headline 95.6% “Employment” rate might make you believe.  The difference between the Unemployment Rate and the Labor Force Participation Rate is complicated, but boils down to whether that person really wants to be working or not.

Those of us who are working average $26.25 per hour and put in 34.5 hours per week.  That keeps wage-based inflation steady at a 2.5% year-over-year growth rate.

After starting to slide upward for no apparent reason over the last ten days, hopefully interest rates will settle back down now that the confusing but uneventful Jobs Report is behind us.

Newly created jobs, as measured by the ADP Payrolls came in at 158K, less than the 180K expected.  Though still at historic lows, Initial Jobless claims rose to 248K.  These two factors should help rates improve, but the market is spooked.  The 10 Year has broken above 2.385% and has room to grow.  Rates across the boards are trending upward.  Again, there is no apparent reason for the uptick in interest rates, other than the market driving itself–like a Tesla, or whatever this pictured car is.  Kind of scary.

The Case Shiller 20-City Index rose 5.7% over the last 12 months, which is up from the 5.5% year-over-year gains posted the previous month.  In my little experience, I am seeing that rising home prices and rising interest rates are making it increasingly difficult for low income families to purchase a house.  Though the value of goods in most sectors is increasing, there is a buyer for just about everything out there for sale.  Consequently, Consumer Confidence swelled well past the 113.3 expected index reading to an astonishingly high 125.6.  Consumer spending accounts for 2/3 of the economy, so a positive outlook is a big deal , because it typically leads to big spending later on.  The danger to the mortgage market is that with increased spending and higher prices comes inflation, which always pushes interest rates upward.  

Pending Home Sales rose 1.6% last month, beating the 0.6% expected rise by 1.0%–if I did my math right.  November’s number showed a -2.5% decline, so we’ll gladly take a positive number to start out the new year.

Personal Income rose 0.3% last month, a little off the 0.4% increase expected, but better than the goose egg 0.0% from November. Consumer Spending rose 0.5%, which was right in line with expectations.  Mr. T pities the fool who spends more than they earn, be it a family or a country.

The Fed hasn’t been throwing any new money into the mortgage market, but is still buying $8-9 Billion in mortgage backed securities each and every week as their current investments mature.  This has done more to keep mortgage rates low than the Fed Funds Rate manipulation, but we haven’t even talked about TARP in any way for a few years.  Maybe Janet Yellen will mention the program at the conclusion of the FOMC meeting on Wednesday.  Their goal had been to eventually get out of the the purchasing game and let rates stabilize on their own.  The MBS purchasing program has been going on now form almost nine years and has kept rates at record lows during the entire time.

This week brings a Fed Meeting (and the slim possibility of a rate hike), housing data, and a jobs report.

Running of the Bulls?

I am home with my wife, who is recovering from surgery this week, and it’s tough to want to write about the financial markets.  But when the DOW trades above 20,000 for the first time ever, it’s worth a word or two.  Typically after the DOW has hit *000 levels over the last 40 years, the index has risen higher, more quickly, than just before the thousand-level was broken.  This will pull money out of other assets, like bonds, as traders seek to join the throngs cashing in on the bullish move.  That rush to ride the bull wave will take its toll on rates.  Watch for in increase over the next week. That’s my prediction.