Oct 062015

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By G. Steven Bray

Rate watchers hardly could have dreamed of a better result for last Friday’s jobs report. Simply put, the report stunk. Jobs created were about 2/3rds of what was expected, and the numbers for previous months were reduced. Wages once again are stagnant, and hours worked declined. And to top it all off, the workforce participation rate dropped to a level not seen since 1977.

Markets responded by dropping rates to their lowest levels in 5 months, at least briefly. Markets seem ill-at-ease with rates this low, and they’ve bounced back this week towards their previous range. Now, understand this is a pretty sweet range with 30-year mortgage rates around 4%. But it just feels like they should be lower.

I think markets are ruminating – yes, like a cow. Interest rates are most strongly correlated with inflation and economic growth. Inflation continues to be almost non-existent and thus is exerting no pressure on rates. US consumers finally are providing some support for the US economy, but global economies are showing signs of struggle, especially the Chinese economy. Does this jobs report signal the US economy is turning, too? Finally, we have the Fed, which seems bound and determined to raise rates this year. Grind that cud.

For the near term, I suspect rates will hold their current range, seeking more input to set a direction. That input may come in the form of an unexpected event, which makes predicting the medium term a crapshoot.

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