Back on Pace Again

After a respite in January, payrolls returned to form in February: Job growth was again in excess of 200,000 for the month. Specifically, payrolls rose by 242,000, which held the unemployment rate at 4.9%. What’s more, another 30,000 was added to the payroll tally for the prior two months.

Markets have certainly turned more optimistic in recent weeks. Stocks are again on the rise; commodity prices continue to trend higher.  Oil, in particular, is up $9 a barrel over the past three weeks. This isn’t great news for us at the pump, but it is good news for the U.S. oil-and-gas sector, which has struggled with $30-a-barrel oil. (The sector swims in debt, estimated at $2 trillion, that needs to be serviced.) Nevertheless, gasoline remains below $2 a gallon in many parts of the country. Higher energy prices are unlikely to send the economy into a tailspin.

More good news is found in the U.S. dollar, which has loosened its grip on the world economy. The dollar has depreciated against many currencies. This makes it less expensive for foreign countries to import commodities, because most international transactions are settled in dollars. A falling dollar is also indicative of a rising risk appetite. The dollar and dollar-denominated investments – e.g., U.S. Treasury securities – are viewed as havens. Fewer investors are seeking havens these days.

Things are looking pretty good. When things are looking pretty good, lending rates tend to rise. The yield on the 10-year U.S. Treasury note hovers around 1.9% – 20 basis points higher than where it was two weeks ago. As the 10-year note goes, so, too, go mortgage rates. Not surprisingly, mortgage rates have been on the rise. The 30-year fixed-rate mortgage, though still priced well below 4% for best execution, is at a one-month high.

Odds are rising that another interest-rate increase could come sooner than later. Last week, traders in federal funds rate futures contracts were placing a 30% chance of another rate increase by June. The odds of a June rate hike have increased to 35%.

Of course, just because the Federal Reserve raises the federal funds rate doesn’t mean all rates will rise. Market interest rates have remained staid since the Fed implemented its first rate increase this past December.  That said, additional rate increases would be a sign that Fed officials are convinced the economy is on strong footing and that consumer-price inflation has taken hold. This paradigm points to rising market rates, and market rates that are unlikely to backtrack.

Yes, we’ve been down this road before: What goes up can, and has, come down.  But if we’ve got a Fed committed to raising interest rates, there’s less of a chance rates will come down.  We’ve got good lending rates today; odds are falling that they’ll be better tomorrow.

 Information provided by Jessica Regan.

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