It seems that when everyone expects the economy to do poorly, it does the opposite.
This economy just won’t quit, and rates are heading higher as a result.
We ended the week 1/10th of a point higher on Friday, and we added another 1/10th of a point on Monday after investors spent the weekend digesting the ramifications of the new data.
The job market showed up impressively across multiple reports last week, with the mac-daddy jobs report coming in well above expectations on Friday.
The March jobs report showed that the economy added 100,000 more jobs than expectations, plus another 22,000 jobs added through revisions to prior reports.
This is a great snippet from the linked article that sums up what all this means:
“Today’s jobs report raises the possibility that rather than slowing down, job growth might be holding steady,” Nick Bunker, Indeed Hiring Lab’s economic research director for North America, said in a statement. “But this strength is coming from sources that are more sustainable than those that fueled the burst of gains in 2021. March’s jobs numbers were uniformly strong, and upticks in the employment-population ratio and labor force participation in particular suggest that demand for workers is not outstripping supply, like it was a few years back.”
With all other reports on the job market coming in at or better than expectations, it’s hard to poke holes in the strength we’re seeing.
That said, things can turn quickly, which is why it’s really hard to forecast rates.
It seems that when everyone expects the economy to do poorly, it does the opposite.
Now…more and more people are expecting the economy to get stronger (I’m not one of them)…so will it also do the opposite?
IMO, this is exactly the type of environment that’s ripe for a swift kick in the nether region.
When stocks and other assets are on a tear like they have been, the wealth effect creates a sense of confidence and even euphoria that’s built on growing wealth on paper, not necessarily growing cash in pockets.
If that “bubble” pops, all that paper confidence disappears quickly, followed by a big pullback in spending and layoffs.
It feels like we’re one unexpected news story away from that bubble popping. 🔮
How’s Brian feeling about mortgage rates?
Even less optimistic, but still waiting for the shoe to drop.
- 3-month outlook (June 2024) – My whole thesis on rates coming down relied on the job market showing cracks. It hasn’t. Now I think rates have to go higher before they can go lower. A lot rides on this next CPI.
- 6-month outlook (September 2024) – Wild-ass guess = We’ll be in the same range that we are now… 6.8% – 7.2%.
- ***12-month outlook (March 2025) – Wilder-ass guess = My bet is on something breaking in the next 12 months, the stock market correcting as a result, and mortgage rates improving to the 6.0-6.5% range.
***The wildcard is the US government. If they don’t do some massive budget cuts to get spending under control soon I could see the demand for US Treasury debt falling off a cliff and that could drive all rates higher. Or maybe the 30-year fixed mortgage will be seen as a safer bet and the yield between the two will no longer correlate as it has in the past? 🤷♂️
Other Relevant Macro News
- Largest one-year population increase in US history – almost all of it is from immigration.
- And staying on theme…here’s how immigration is boosting the job market.
The Week Ahead
- It’s CPI week. 😵 The report drops on Wednesday. Rates could have and arguably should have gone higher after that jobs report – the theory is that inflation matters more so bond investors are waiting on this report before fully giving up on the optimistic rate expectations they’ve held onto all year. There is definitely more risk for rates going higher than going lower. If this report shows hotter-than-expected inflation, we’ll likely see rates give up a lot of ground to the higher side. If it comes in at or better than expected, we should be able to hold on to this range between 6.8%-7.2% until the next big update.
