Brace thyself. Mortgage rates are above 4 percent for the first time since December, taken up by an overnight rout in the 10-year T-note (and a lot of other markets). Last night 10s were hanging on to the two-year downtrend at 2.11 percent, and are now 2.25 percent.
As always, take it one piece at a time. First of all, the dive in 10s from 2.35 percent at Christmas to 1.65 percent in early February — one-third in six weeks! — was a tad peculiar. Most of us thought the cause was exceedingly low yields overseas, and every major central bank trying to devalue its currency versus the dollar. I still believe that, and believe foreign conditions are a strong counterweight to Fed tightening. The Fed thinks so, too, which may force it to tighten harder, right or wrong.
Charts aside, the overnight driver was an upside surprise in February payrolls, another 295,000 jobs. Despite claims of a “strong” report and violent market reaction, the thing is shot full of holes. One-third of the jobs were hospitality and retail, protected from foreign competition, but dead-end, unstable and poor-paying. Average hourly earnings rose $0.03, up 0.01 percent for the month and decelerated to 2 percent year over year. More people at work even at lousy wages means more national income, but at this rate of change, increasing inflation is impossible.
Trading in every market today says they are worried about the Fed, not inflation. Every market has interpreted the February job data as conclusive impetus to Fed tightening. Every market has been slow to take the Fed at its word, warning day after day for many months that it is aching to lift off from 0 percent. Six years-plus at 0 percent, every Fed economic forecast wrong on the happy side, disbelief has been good business.
Not now. The stock market usually rises on good economic news. This winter it began to countertrade. Good news means the Fed is comin’, so sell. Midday today, the Dow is off and looks worse.
The currency complex confirms. Next week the European Central Bank will begin a $60 billion per month quantitative easing program, flooding the world with euros. The Fed is about to tighten. Hence the euro just this morning lost 2 percent of its value, trading at $1.08, the lowest in 13 years.
QE helps economies three ways:
- It pushes investors to take risk (a silly thing to do in Europe).
- It forces down long-term rates, which in Europe are already down, in Germany below zero beyond 7-year maturities and 0.35 percent for 10 years.
- It weakens your currency. ECB QE will bring only the last benefit, a euro weak enough to help Club Med (and absurdly low for Germany).
Currencies are odd stuff. A low euro does not help versus any competitor also devaluing, which every one has except China, which will soon be forced to, and except the U.S.
The U.S. is now in the position of Club Med at the outset of the euro. In part we feel rich: Everything we buy from overseas has gotten cheaper. But that’s a hollow and fleeting victory. The wage component of everything produced overseas — goods and services — has fallen in value, pushing down on U.S. wages. Zero-sum: Any benefit to the devaluers is a cost to the U.S.
I do NOT want to be Janet Yellen, not now. The market is raising U.S. interest rates out of fear of the Fed, which hasn’t done anything. Stocks are sinking in an anti-wealth effect, frightened by future-Fed. The strong-dollar sugar high will fade into downward pressure on both wages and inflation, and noncompetitive U.S. exports. The last thing housing needs is a mortgage-rate whack in the slats. Low oil prices are a stimulus, but damaged households won’t spend the savings.
All of that on the thought of a 0.25 percent hike in June? No, there is more: Markets anticipate the future as far out as they can worry, and the movement we see today is the beginning of pricing-in fear of the next move, and the next, and next and …
Rates are not going back down unless the economy visibly slows, or until some bad accident overseas. The only thing holding back the Fed, mesmerized by old relationships between unemployment and wages: politics. How are you going to make the tightening sale with wages flat and inflation falling?
Lou Barnes is a mortgage broker based in Boulder, Colorado. He can be reached at lbarnes@pmglending.com.
