Good Friday AM,
Bonds are still dicey!
The ten-year did run up and test 3.90%, as we expected. Mortgage Bonds fell hard at the open and broke below the floor of support. The price quickly ran back up above the support level. We do not know if it will hold a third attempt, let’s hope we do not retest that support. If we fail to hold that line, pricing will deteriorate another 40bps. If the ten-year does not hold 3.90, clearly it will retest 4%. We have no meaningful news until next Friday. While the charts look VERY bearish, I see a probability of the ten-year holding 3.90%. If you see a close above that level, all bets are off.
I am going to take a pause from the commentary below to insert two important graphs of the history of interest rates (the redline is where we are today) and the historical interest rate spreads between the 10-yr note and the 30-yr mortgage rate (which is why I know rates are coming down regardless of what the Fed does) When Chairman Powell says no more tightening, rates are going to drop.
Really good piece on bonds:
Bonds came into this week in a funk after those sizzling hot January jobs numbers for the US. Things got worse after a slew of signals that inflation will remain sticky boosted expectations that central bank rates are going up and staying up in Europe, the US and even Australia. The global tightening wave that was supposed to have peaked is instead gathering strength as policymakers repeat the mantra that they need to stay strong to tame inflation. Data around the globe offers them plenty of reasons to be vigilant.
US two-year yields bore much of the brunt, jumping to the highest since November after strong retail sales and inflation prints underscored the potential for further Federal Reserve interest-rate hikes. Two of the Fed’s harshest hawks even talked of a possible return to half-point increases. Traders pushed up their expectations for peak rates and also pushed back the expected timeframe for policy easing. However, they stuck with bets that when rate cuts do come they will be steep, driving the yield curve into a deeper inversion as the bond market becomes more and more convinced that a recession is coming. That’s not a view evident in the more resilient stock market — spurring JPMorgan Chase & Co. strategist Marko Kolanovic to suggest investors should dump equities and buy bonds instead. Steve Eisman — of “Big Short” fame — says the jump in real yields that’s gone on has spurred him to buy bonds for the first time in 15 years.
There was an interesting story in the WSJ on employment, wages, household income and net worth. Here is the link. I have been curious as to where these anomalous jobs gains are coming from and how retail spending jumped. The reported numbers require a deeper dive to better understand them. I am not sure that the job gains we are seeing add as much to the economy as what the headline number suggest. In fact, I am quite positive they don’t.
Here is an excerpt from the story.
That isn’t happening now. Early in the pandemic, several rounds of government relief allowed Americans in general, and lower-income Americans in particular, to build up their finances. Then the job market came roaring back and poorer workers found they could get paid a lot more than they did before. Many white-collar professionals haven’t seen their wages outstrip inflation, but people doing lower-paying work have, and the latter group’s wealth has risen more, too. Sure, it is still better to be rich and college-educated than poor and not.
After decades of widening, though, the gap between the two groups has narrowed. It could shrink even more. Consider all those layoff announcements. About half of them have come from tech companies since November, according to outplacement firm Challenger, Gray & Christmas—ones that often compensate their workers handsomely. As of 2021, for example, the top-paying company in the S&P 500 was Google parent Alphabet, with median pay of about $296,000. Last month, Alphabet said it would cut 12,000 jobs.
Those tech workers have skills useful outside Silicon Valley, but an insurance company or newspaper might not be ready to pay a data scientist as much as Alphabet did. Meanwhile, there is still unmet demand for work typically done by lower-income earners. Employment in leisure and hospitality still hasn’t recovered from the pandemic, for example, despite lots of “Help Wanted” signs. The Labor Department reports that, as of December, the sector had about a million more unfilled jobs than before the pandemic.
Is the economy as strong as the Fed thinks?
Please remain safe and stay healthy, enjoy the weekend and first, make today great!