Long-term interest rates have held a crucial edge today despite another outsize gain in payrolls. Job gains show increasing health, but low and stable wage increases have given us a stay of execution.
Not a reprieve. It’s just matter of days or weeks until long rates break upward.
The edge upon which we stand is 2.60 percent on the 10-year U.S. T-note, and roughly 4.375 percent for mortgages. Tens have traded between 2.35 percent and 2.60 percent since the election, and there is no chart “support” above 2.60 percent all the way to 3.00 percent. The break will be substantial, and volatility will follow.
The Fed will raise the overnight cost of money on Wednesday, from a band 0.50 percent-0.75 percent to 0.75 percent-1.00 percent. That Fed move is already built in to rates.
The long-term break upward will depend in part on what the Fed says next week about further hikes to come, but inevitability is at hand. Other markets have begun to react, stocks perhaps topping, the commodity complex down, Fed action cutting the chance of future inflation.
The Fed and the rate picture ahead…good news!
It will be uncomfortable for housing, as always, which may be a Fed-limiting condition, but the Fed is hiking because the economic recovery is doing better and better. And with exceedingly low inflation, aided by the persistent oversupply of oil and gas.
The Fed says it is merely removing excessive accommodation, and that’s neither evasive nor propaganda.
To measure Fed-tight versus Fed-easy, glance at the Fed funds rate (the overnight cost of money) versus inflation. If Fed funds are below inflation, the Fed is very easy; a normal, neutral Fed funds rate is a percentage point or two above inflation, and “tight” is higher than that.
The inflation rate now is close to 2 percent, so the Fed even after Wednesday’s hike will remain very easy.
A blue-sky guess at the future: The Fed will continue to hike, but after the first big jump above 10-year 2.60 percent, the “yield curve” will flatten, long-term rates rising less than the Fed’s boost of short-term ones.
In excellent Fed news, and surprising, the Trump administration’s tentative nominees for Fed Governor are purely mainstream. No one with doctrinaire opinions, just capable people.
The administration has said nothing about Chair Yellen’s future, and the hike next week may precipitate that conversation. I have expected an explosive moment between the Fed and the Tweeter, but the economic czars — Mnuchin and Cohn — seem to be left alone by the political operatives.
Fifty days into the administration, more things come clear. Consistent with quality potential Fed appointees, the administration continues to elevate good people to some key posts: This week Jon Huntsman appointed ambassador to Russia.
Mitch McConnell this week spoke truth, perhaps not intending such clarity. Would Mexico pay for the border wall? “Uh, no.”
Trying to organize support for repeal and replacement of Obamacare, “We need to deliver. We’re in the outcome business now.” Good luck trying to organize a party of outsider-gripers and secessionists.
The Obamacare outcome will have little economic effect (except upon several million of our most vulnerable citizens), and no matter what happens it will be a Republican albatross. The problem with health care is excessive cost, almost double what the rest of the world pays, not excessive coverage or subsidy.
The Border Adjustment Tax is dead, and with it the giveaway tax “reform” and cuts. Every 1-percent hike by the Fed will add a $170 billion annual interest cost to the Federal budget; we need more revenue, not less.
Regulation will be trimmed, but the economic effect will be minor and creating as many political foes as friends.
The 10-year T-note in the last year.
The 10-year T-note in the last year. The narrow range since November is stark.
The 2-year T-note in the last two years.
Here is the 2-year T-note in the last two years, showing the market’s anticipation of Fed tightening to come. Note the new spike on the far right, beginning to price the next hike after Wednesday’s. The spread between 2s and 10s is likely to narrow, 2s rising from underneath.
The Atlanta Fed GDP tracker
The Atlanta Fed GDP tracker shows an abrupt fade in the 1st quarter, but most likely a quirk of inventories. Business over-built them in the fourth quarter (big GDP pop), now running the down but building-in an inventory replacement pop for the 2nd quarter ahead. If anything the economy is out-performing the Fed’s forecast.
Lou Barnes is a mortgage broker based in Boulder, Colorado. He can be reached at lbarnes@pmglending.com.
