December 1, 2016, 4:00pm EST
Tomorrow we get the last jobs report of the year. And unlike the other 11 this year, this one doesn’t have the same buzz surrounding it, even though we have a big Fed meeting coming in just two weeks.
Why? It’s no longer a Fed-driven (monetary policy-driven) world. The switch has been flipped. With the Trump presidency bringing structural change and fiscal stimulus to the table; the markets, the economy, sentiment that has hinged so tightly to each data point has become far less fragile.
Earlier in the week, I talked about the inflationary effect of an OPEC cut. That’s continuing to reflect in the interest rate market. The 10 year yield ran up to just shy of 2.50% today. On a relative basis, it’s a huge move. Given where it has traveled from, it looks like an incredibly dramatic and even a destabilizing move. But on an absolute basis, a 2.5% interest rate on lending your money for 10 years is peanuts (i.e. it remains a highly attractive borrowing environment).
And if we step back and consider where we were last December, when the Fed made its first move on rates, the market had priced in the rate hike, and stood at 2.25% going into the decision. Following the Fed’s move, the bond markets started expressing the view that the Fed had made a mistake in its projection that the economy could withstand four hikes over the subsequent 12 months. That’s what they were telegraphing. And for that, the bond market began telegraphing chances of a Fed-induced recession.
Given the events of the past month, and the outlook for a more pro-growth environment for next year, the message that the bond market is sending is simply a perfectly priced in 25 basis point hike by the Fed this month, into an economy that can withstand it. Imagine that.
The fact that the jobs numbers and the Fed are becoming a smaller piece of the market narrative is very positive. In fact, I would argue there hasn’t been a jobs report, with a Fed meeting nearby, that has been less scrutinized in eight years.
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August 22, 2016, 4:30pm EST
As we head into the end of August, people continue to parse every word and move the Fed makes. Yellen gives a speech later this week at Jackson Hole (at an economic conference hosted by the Kansas City Fed), where her predecessor Bernanke once lit a fire under asset prices by telegraphing another round of QE.
Still, a quarter point hike (or not) from a level that remains near zero, shouldn’t be top on everyone’s mind. Keep in mind a huge chunk of the developed world’s sovereign bond market is in negative yield territory. And just two weeks ago Bernanke himself, intimated, not only should the Fed not raise rates soon, but could do everyone a favor — including the economy — by dialing down market expectations of such.
But the point we’ve been focused on is U.S. market and economic performance. Is the landscape favorable or unfavorable?
The narrative in the media (and for much of Wall Street) would have you think unfavorable. And given that largely pessimistic view of what lies ahead, expectations are low. When expectations are low (or skewed either direction) you get the opportunity to surprise. And positive surprises, with respect to the economy, can be a self-reinforcing events.
The reality is, we have a fundamental backdrop that provides fertile ground for good economic activity.
For perspective, let’s take a look at a few charts.
We have unemployment under 5%. Relative to history, it’s clearly in territory to fuel solid growth, but still far from a tight labor market.
What about the “real” unemployment rate all of the bears often refer to. When you add in “marginally attached” or discouraged job seekers and those working part-time for economic reasons (working part time but would like full time jobs) the rate is higher. But as you can see in the chart below that rate (the blue line) is returning to pre-crisis levels.
In the next chart, as we know, mortgage rates are at record lows – a 30 year fixed mortgage for about 3.5%.
Car loans are near record lows. This Fed chart shows near record lows. Take a look at your local credit union or car dealer and you’ll find used car loans going for 2%-3% and new car loans going for 0%-1%.
What about gas? In the chart below, you can see that gas is cheap relative to the past fifteen years, and after adjusted for inflation it’s near the cheapest levels ever.
Add to that, household balance sheets are in the best shape in a very long time. This chart goes back more than three decades and shows household debt service payments as a percent of disposable personal income.
As we’ve discussed before, the central banks have have pinned down interest rates that have warded off a deflationary spiral — and they’ve created the framework of incentives to hire, spend and invest. You can see a lot of that work reflected in the charts above.
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