A bizarre sequence of events and data has taken bond and mortgage yields to their lows of the year, the 10-year Treasury note 2.58 percent and mortgages near 4.5 percent.
Ukraine is the largest immediate force pushing down on rates, but we’ll review that after trying to make sense of the most contradictory steam of economic data in a long time. First-quarter GDP on Wednesday looked like the onset of recession; the Fed’s same-day post-meeting minutes had an other-worldly calm. Today’s April employment report boomed, on the surface at least.
A foreword on data: Many civilians regard economic data as books baked by conspirators. Too many professionals support this cynicism in their sales pitches.
Don’t believe any of that: The agencies compiling data do the best they can. When the numbers look as crazy as they do now, we are either beyond our ability to describe our economy or the economy has departed its prior patterns, or both. Today, both. A third thicket for civilians to untangle: the professional spinners, 90 percent of them sunshine boys.
GDP rose only 0.1 percent annualized in the first 90 days of 2014, and were it not for “Obamacare” sign-ups boosting “services consumption” it would have shrunk more than a point. Affordable Care Act “consumption,” of course, acts more like a tax.
The usual suspects dismissed the quarter as bad weather, including a 7.6 percent tank in exports. That’s not weather; that’s the whole fool world trying simultaneously to export its way out of trouble.
It was a rotten 90 days, but temporarily below-trend, not prerecession. The ISM manufacturing survey has been stable in the low 50s all through 2014. But the GDP report confirmed one persistent flaw in the economy: Incomes are losing ground even to very low inflation. The BLS Employment Cost Index rose 0.3 percent in the first quarter, the worst performance since stats began in 1980.
Enter the monthly payroll report: 288,000 net-new jobs! Unemployment to 6.3 percent!
Nobody outside the stock market or White House believes either number. You’d think there was a way to know for sure how many people are at work, or not, but the devil is in seasonal adjustment.
So, look to several-month averages, which leads so many analysts to smile wisely, note almost 200,000 new jobs monthly and announce, “The economy is slowly healing.”
I wish I had one of those guys nearby to strangle, slowly. Look to long-term averages, but also cross-foot disparate reports for confirmation. Buried in the payroll figure: Average hourly earnings in this booming April rose … zero. Zip, zed.
Theory holds that as any pool of available labor shrinks, employers will compete by paying higher wages. Today’s pool is global. Oceanic. Workers still are competing with each other to find jobs and accepting poor pay. Not the compressive gouging by employers 100 years ago, just electron-greased global substitution.
Slowly healing? Another few years in that wheelchair and we’ll have you on crutches!
Interest rates are going to stay down until wages turn, if only because inflation cannot move up, out of this too-low danger zone until wages rise.
Ukraine. Markets for months have assumed that Ukraine will be mostly or completely absorbed by Vladimir. Alarm has returned to markets only upon combat, no matter how inevitable the outcome for Ukraine. Serious sanctions would also have effect, but they are even less likely than Ukraine’s survival.
History marks today’s dilemma. Never promise to defend a place if you can’t. That only emboldens futile resistance (Budapest ’56, Prague ’68), or gets something big going (Poland ’39). On the other hand, feeding pieces of your neighbors to the barbarian du jour can leave you alone on the menu, and Ukraine more resembles 1938 than any situation since.
President Obama and German Chancellor Angela Merkel have been the least active pair of free world leaders since the big war, tempting adversaries to interpret restraint as weakness. A John McCain spasm would be wrong, but how to demonstrate resolve? Baseballers call this a “tough chance.” Although restraint is right, watching Ukraine go down is terrible.
How do we know that Ukraine is more important than a boom in payrolls? Looking at today’s trading in 10-year Treasury notes, yields took off on release of the job data. It had been bid down since the GDP numbers Wednesday, traders hoping for a weak job report. As soon as news of combat in Ukraine broke, 10-year Treasury notes broke to the 2014 low.
Yields on 10-year Treasury notes Friday May 2, 2014.
Looking at yields for 10-year Treasury notes over the last six months, the low today is marginal, more a “Friday effect” than breakthrough. Big investors of all kinds buying bonds for safety before the weekend are likely to unload on Monday if Ukraine gets no worse, and rates will go back up.
Yields on 10-year Treasury notes during last six months.
Lou Barnes is a mortgage broker based in Boulder, Colo. He can be reached at lbarnes@pmglending.com.
