Dec 052018
 

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By G. Steven Bray

It’s another jobs report week, and this could be an important one for mortgage rates. Rates have been trending down slowly for the last couple weeks aided by low oil prices and concerns about the sustainability of economic growth. It’s the latter that should be of more interest to those wanting lower interest rates.

While US economic data remains strong, market sentiment has become more equivocal. Several factors have contributed to this turn.

– The Federal Reserve has hiked short term interest rates three times this year and seems likely to hike again in a couple weeks. Markets worry that higher rates are going to choke off growth by making it harder for consumers and businesses to afford debt. An indication of their concern is the Treasury yield curve, the yield difference between short and long term Treasury bonds. The difference is as small as it’s been since the last recession and could go negative soon. A negative, or inverted yield curve has been an accurate indicator of recessions for the last half century.

– Even though the US economy appears strong, other economies have softened, and the World Bank continues to lower its estimates for global growth. Brexit and the Italian budget crisis add further uncertainty to the mix. A global slowdown should increase the appetite for US debt and reduce inflationary pressures, both of which help interest rates.

– Finally, some investors are simply worried the current economic expansion has gone on too long, and they don’t want to get caught on the wrong side of trading when it ends.

The wildcard this week is the jobs report on Friday. Watch the wage component of the report. Wage growth has moderated slightly since it jumped earlier this year. If that moderation continues, markets are likely to consider it a validation of the recent decline in rates. If the report shows elevated wage pressures, our recent holiday from higher rates could come to an end very quickly.

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