Forces building since October have at last blown long-term rates to the next levels. The all-defining 10-year Treasury note was trading at 3.66 percent this morning (prior range: 3.28 percent to 3.51 percent, which held since early December), and there is nothing to stop it short of 4 percent, the April top in 2010.
The mortgage damage is similar, low-fee 30-year loans pushing 5.25 percent.
The twin impetus pushing the rate rise — stronger economic numbers and borrowing by the Treasury — are not rocket science, but the details are more "Through the Looking Glass" than normal recovery cycle.
The economy has not changed pattern; we just have a great deal more of the same. Business giants, joined by any venture plugged into the global economy, have accelerated to a new plane — not just earnings, but now "top line" growth in revenue.
Those who thought the emerging world could pull the U.S. caboose were correct. The Institute for Supply Management has surveyed big business for 88 years, and the January findings are spectacular: manufacturing to 60.8 (versus 57 in December and 58.2 expected, and the best reading since 2004) and the vastly larger service sector to 59.4, one of the highest results on record.
December Factory orders were forecast to decline 0.7 percent, and instead rose 0.2 percent, and November was revised a half-point up.
The China-led steam engine is pulling more trains than ours: Unemployment in Germany has fallen to an 18-year low. Northern Europe also benefits from a euro undervalued for them, held artificially low by "Club Med" nations’ travails. However, quiet in that crisis has reduced safety-buying of U.S. Treasurys.
The pattern is the same: The big and global are doing well, but they are not hiring here. The gorilla of all economic reports released today found payrolls growing by only 36,000 jobs in January versus forecasts of four times that. The weakness was dismissed as weather distortion.
The unemployment rate lowered to 9 percent from 9.4 percent, trumpeted as a great victory (if you’re a stock market smoke-blower, you get to pick your weather).
Unemployment fell entirely because the percent of Americans in the workforce — defined as people looking for work — fell by a half-million souls to 64.2 percent, the lowest sustained reading since the ’70s, when women had just begun to take jobs outside of homes.
The locomotive of U.S. employment is small business. We will learn on Tuesday, Feb. 8, from the National Federation of Independent Business survey, if there is big-biz pull-through to small-biz. I doubt it — small business correlates strongly with housing.
The NFIB has found for three years that the worst problem facing small business is poor sales (duh), and that reflects the financial condition of households. Rising mortgage rates do not help.
It is possible that we are on the threshold of a top-down business recovery, and the first recovery in 65 years in which housing will be last. It’s possible.
Meanwhile, the jump in long-term rates since October, now 1.25 percent overall and a 50 percent increase from the 2.5 percent 10-year at the time … has bond vigilante fingerprints all over it. Better: palm prints on the shoulder blades of a market still in freefall.
A money-manager friend whom I deeply respect insisted this week that long-term rates move only with inflation, and not the supply of new bonds. The market this week said otherwise.
Prior to every payroll report (first Friday of every month) the bond market freezes because the data is so important and forecasts are black comedy. The 10-year yield broke upward out of its range yesterday, before the payroll data, and has continued to move up despite a report weaker than anybody thought.
The near-term reason: Next week the Treasury will raise $72 billion in long-term cash by selling new bonds in a three-day auction. The Fed’s QE2 (second round of quantitative easing) will buy a like amount of the same paper this month, but tenders of old paper when the Fed offers to buy are dwarfing QE2. The Fed will stop buying long paper in June.
Then who will want the stuff? So long as U.S. political leadership is unwilling to engage fiscal affairs, borrowing half of all spending open-ended, the vigilantes will be in charge and able to intercept recovery.
