Jul 032019
 

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By G. Steven Bray

The interest rate rally has hit the pause button again, and all eyes appear to be on this Friday’s jobs report.

Rates really started rallying lower after the last jobs report missed expectations so badly. Investors immediately started predicting rate cuts by the Federal Reserve and questioning when the next recession would begin. The Fed acknowledged a potential slowdown at its Jun meeting and didn’t really dissuade the rate cut talk.

The market currently is pricing in a nearly 100% chance of the Fed cutting rates at its end-of-July meeting.

So, what happens if Friday’s jobs report isn’t awful – and what is awful? Well, markets are predicting about 160,000 jobs were created last month, so awful is probably a number below 100,000. Other recent economic data has shown slower growth, but still growth, so it’s quite possible that the Jun number was an outlier – or that it gets revised higher.

I think the Fed has a tricky job this time around. Other economies, in particular the European Union and China, appear to be in the early stages of contraction, and the trade war with China seems to have taken a bite out of the US economy. I suspect the Fed doesn’t want to be seen as caving to the markets, which really want to see a rate cut. However, if other economies slip into recession, and the Fed hasn’t done something to boost confidence, investors may pull back sharply and drag the US into recession, as well.

Should you lock or float? If you’re closing in Jul, and you’re risk averse, today is a good day to lock your rate. Rates are as low as they’ve been in a long time. They could get lower, but probably not much lower until after the Fed meeting. If you like to roll the dice, I think it would take a strong jobs report to send rates much higher. I think the more likely scenario is moderate job growth that leaves rates about where they’ve been for the last month.

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