July 10th, 2013 9:32 AM by Mel Samick
Friday's employment report was quite good. Following a 195,000 payroll gain in June and a 70,000 cumulative upward revision to prior months, the payroll survey now shows a steady pace of almost exactly 200,000 new jobs per month at the 3-, 6-, and 12-month horizon. Average hourly earnings growth also surprised on the upside and now stands at 2.2 percent year-on-year, the fastest pace since mid-2011. The report showed the third consecutive increase in labor force participation, raising hopes that the long slide is finally behind us. As a result, bond markets reacted sharply with a huge sell off. Following the news, Ten-year treasury rates rose by 25 basis points, reaching the level of 2.75 percent. For perspective, this kind of sharp move in one day is an extremely rare event.
While quite a few words have become popular in the financial lexicon during this downturn cycle, the top on the charts currently is the word "taper". Market is trying to over-guess and over-analyze when the Fed is going to go slow or “taper” their scheduled bond purchases as a form of quantitative easing (QE – another popular word). Expectations for a September tapering have been firmly established into the financial futures markets following Friday's payroll report. If the data weaken anew over the next couple of months, inflation falls further, or financial conditions tighten sharply, the Fed committee might decide to postpone tapering to the December meeting or beyond. Many market experts are of the view that Fed officials are taking an unnecessary risk in exposing the U.S. economy to tighter financial conditions at the first signs that the recovery is finding its footing. They believe that with inflation well below target and large amounts of slack in the labor market, there are not many upsides in tapering early. Further, the bond mutual funds, mostly held by retail investors, have seen nearly $1 trillion in inflows between 2009 and late 2012; policy-makers do not want to witness violent outflows from these very same bond-funds, which in turn could lend itself to a repeat of the 1994 bond market route. The Fed could potentially lose control in trying to manage the risk of withdrawing stimulus. Fed officials have raised the tapering balloon, but now it has to be contained.
If you are still dreaming to refinance your existing mortgage then you may be pressing the snooze button as rates have moved up sharply to levels last seen two years back. If some borrower imagined getting 3.25 percent, a few months back, on a 30-year fixed, he or she could be in a state of shock at seeing above 4.25 percent on the same mortgage. However, despite these high rates, in many markets in the country purchasing a home is still affordable and will continue to be even if rates continue to rise especially when compared to the cost of renting. In its latest monthly data Trulia found that rents are up 2.8 percent year-over-year, the biggest increase since January. Hopefully, the purchase market can gain strength and continue the revival of the housing sector.
Some noteworthy U.S. economy spotlights are:
· Initial claims for unemployment for the week ending June 29 were 343,000, down from 348,000 the prior week.
· The ISM index rose to 50.9 in June, up from 49.0 in May.
· Total auto sales in June were at a 16.0 million annual rate in June, up from 15.3 million in May.
· Factory orders rose 2.1 percent in May, up from an upwardly revised 1.3 percent in April.
· The average household size in the U.S. fell to 2.55 in 2012, down from 2.56 in 2011 according to Bank of America. This was the lowest level since the founding of the nation, reports the Census Bureau.
During this week's economic calendar much of the attention will most likely be focused on the FOMC minutes on Wednesday, Jobless Claims on Thursday and Producer Price Index on Friday.
Information provided by NYCB Capital Markets