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By G. Steven Bray
Bond markets have reacted favorably to Fed Chair Yellen’s dovish comments about interest rate hikes and the current state of the economy. Markets, both bond and stock, rallied, then rallied some more. Even a fairly strong jobs report last Fri couldn’t dissuade them.
On that note, let’s review some of the factors in play.
– Fed members cut their rate hike expectations for 2016 from 4 to 2. That wasn’t the surprise. The surprise was Yellen’s comments suggesting the Fed could consider a rate drop.
– European economic data remains pretty lousy, and German bond rates are near record lows. Low German rates exert downward pressure on US rates.
– Most economists have lowered their predictions for 1st quarter GDP, some to near zero. Remember that this is backward looking data, but it does suggest some inertia the economy must overcome to generate growth.
– Recent US manufacturing data is showing a rebound in that sector. That might suggest growth in the 2nd quarter.
– Wage growth exceeded expectations in last week’s jobs report. That could foretell budding inflationary pressures, which could force the Fed to raise rates more quickly.
On balance, I can make a case for optimism or pessimism concerning interest rates. In the short term, I think rates are likely to follow the lead of the stock market. The pullback from recent highs is helping rates, and weak earnings reports could accelerate the downtrend.
I’ll leave you with one note of caution. The Fed releases the minutes from its Mar meeting tomorrow. If other Fed members didn’t share Yellen’s dovish outlook, it could snuff out our rate rally. Personally, I think that’s unlikely.
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