The Federal Reserve has two mandates: maximizing employment and stabilizing prices. How hard can that be? Today’s Jobs Report from the Bureau of Labor Statistics calculated that across the entire country last month, there was an increase of only 12,000 aggregated jobs. We were expecting 106,000 and last month that number was 254,000. In a vacuum, the absence of job creation would tank stocks, sending investor dollars into bonds–which in turn would drive interest rates lower.
Our economy is continually becoming less vacuum and more hurricane. One component of the storm is the tremendous amount of leverage being utilized to generate additional investment funds. As loan costs drop, more dollars can be borrowed for the same monthly payment and invested in (hopefully) higher yielding assets. After today’s Jobs Report showed that a weakening in the labor market places the odds of a Fed rate cut next week near 100%, people are borrowing money, not lending money, and the proceeds are flowing out of bonds and into stocks.
The selloff in bonds is ironically driving up the yields of longer-maturing notes (like mortgages) with just a week to go before the Fed cuts the short-term rates. (we’ll probably get more into the yield spread curve again next week). As a whole, the S&P 500 currently sits 1.9% below the all-time-high hit just two weeks ago, and will likely trend upward and surpass that historical high with the 1/4% Fed rate cut next week. It was the most recent Fed rate cut of 1/2% that has propelled the current bull market at the expense of mortgage rates, the latter having risen about 1.0% during the same timespan in an attempt to attract more funding. It remains to be seen what will happen after next Thursday.
Now as for the election next Tuesday, there is absolutely zero correlation between interest rates and elections. Interest rates have been both higher and lower after presidential elections and there is no pattern whatsoever of a republican or democratically controlled legislative branch impacting the direction of interest rates. I know that there are are strong feelings about all things presidential, but your mortgage interest rate is not only bipartisan, it’s apolitical.
