Markets & Economy

Don’t assume strong jobs numbers will trigger Fed rate liftoff

Downward pressure on US long-term rates still very strong

The U.S. 10-year T-note has jumped a quarter-percent in four days, half of the springboard this morning on wild news from the job market. Mortgage damage is limited, low-fee deals still just under 4 percent.

The first Friday each month brings the immediately prior-month count of new jobs. And revisions of prior months, holy smokes. The January figure was above forecast, 257,000 jobs gained, but nothing exciting. However, November was revised from a gain of 353,000 to 423,000, and December from 252,000 to 329,000 — the best three months in 17 years.

Never ever quibble with the data. Don’t gin up government conspiracy theories, or accusations of incompetence. But … but … but … that’s a hell of a lot of jobs, and the explosion does not match other data.

Starting with wages. The Bureau of Labor Statistics’ average hourly earnings spurted oddly in November, a sudden 0.7 percent pulled back by a drop of 0.2 percent in December, and now a January jump of 0.5 percent, distorted by state-level increases in the minimum wage. A rise in the minimum wage is good news for entry-level workers, but it’s not an economic function. The signal to look for is employers paying up to attract workers.

Hourly earnings are not ever as volatile as that. Wages move slowly: The numbers are too big to move quickly, and the three-month series looks like measurement error. The one-year look-back is a 2.2 percent gain, still painfully thin.

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Meanwhile the twin Institute for Supply Management surveys went nowhere in particular in January, the manufacturing one soft (53.5, down from 56.5 in December and 57.7 in November), services still healthy (56.7 from 56.2). The first substantial sign of economic slowing from the very strong dollar: Our trade deficit widened in December to $46.6 billion, way beyond forecast despite another drop in oil imports. Overall imports still increased $5.3 billion and exports dropped $1.5 billion. A strong dollar makes us feel wealthy, but hollows GDP. The fourth quarter may come in below 2 percent annual, less than half of the third, and dollar effects have just begun.

Nearly everyone assumes that today’s strong job picture will embolden the Fed to lift off from zero, and confirm a summer date on the runway. But … but … the best inflation measure of them all — “core personal consumption expenditure deflator” — arrived “less than 0.1 percent” in December, 1.3 percent year over year and falling. The labor participation rate rose, as did unemployment, both counter-indicators to wage-pulled inflation.

Phew. That’s the domestic picture. If that were all, just begin Fed-watch and try to calculate how far, how fast until higher rates break something (housing — which has not picked up even after an entire year of falling rates). But U.S. domestic is not all. The world is bigger than ever, and the Fed is not accustomed to the effects of its gyrations.

Europe will do a little better because of the weak euro, now $1.13, which might push up its bond yields, which at deflation-fearful lows also hold down our bond and mortgage rates. The German 10-year pays 0.343 percent. In a world converging in deflation, Japan’s 10s are exactly the same. The yen has stopped falling despite the BOJ’s Weimar-printing, and Japan’s inflation has also defied the wallpapering.

In geopolitical review, the latest barbarity by ISIS has energized its neighbors, and it’s not on my worry list. Nor is Iran, oil-damaged. Russia is uglier and uglier, and the results of Merkel’s trip can change the interest-rate calculus over this weekend. Greece will not end well, and the end will push down on rates everywhere. China is the great unknown, but it is not likely to do well repairing its credit bubble, nor in restructuring, and odds greatly favor a yuan devaluation versus the dollar.

Double phew. The sum of all of that: Downward pressure on U.S. long-term rates is still very strong. Fed or no Fed. In the perverse world of central banking, liftoff in the overnight cost of money may pull long-term rates down via an even stronger dollar and expectations of future slowdown. As has been the case in charts in the last year.

Lou Barnes is a mortgage broker based in Boulder, Colorado. He can be reached at lbarnes@pmglending.com.