The latest read on the jobs market released today was neither impressive nor disappointing, fueling a sentiment that the Federal Reserve is unlikely to raise rates any time soon. With the job market where it is, the economy is clearly doing well, but not great, some say.
U.S. April payrolls rose by 223,000, lowering the jobless rate to 5.4 percent, according to news reports. That number was an improvement month-on-month from the downwardly revised 85,000 jobs created in March. But year-on-year, the U.S. job market is facing a slowdown on the average number of jobs created every month.
U.S. stocks took that as a cue to run higher—markets clearly like easy-money policies, and a tepid job market offers some insurance that the Fed will not be too quick to act. The SPDR S&P 500 (SPY | A-98) was up nearly 1 percent in early trade on Friday.
Bonds were rallying too, pushing 10-Year Treasury yields down some 4 percent right out of the gates, to 2.15 percent. The iShares 20+ Year Treasury Bond ETF (TLT | A-85) was trading 0.65 percent higher, the upward movement reflecting that bond prices move in the opposite direction of bond yields.
Chart courtesy of StockCharts.com
The Bond Market Offers Clues
A look at the current yield curve shows that the entire curve is below where it was on March 9, 2009—the stock market low. That fact suggests the U.S. economy might be out of intensive care and improving, but it is still under close observation. Nervous investors have been slow to unload bond positions, and quick to add to them at the first whiff of macroeconomic weakness.
As Tyler Mordy, of Hahn Investments, puts it, “more of the same” is probably what lies ahead for market and the economy.
“We are stuck in economic purgatory, more of the same—slow growth, low inflation and low interest rates,” Mordy told ETF.com. “No big surprises [on jobs], but this is encouraging, and is one more data point showing the U.S. moving toward a self-sustaining recovery.”
“Those calling for a bond bear market continue to be too early,” he added. “What’s more interesting for the bond market is the way the global monetary policy narrative is evolving.”
The Global Picture Matters
Fed policy has been largely construed as successful around the globe, making the U.S. economy a leading indicator of what other central banks will do, according to Mordy. If aggressive measures have allowed the U.S. economy to be on the mend after its worst economic downturn since the Great Depression, chances are Japan and the European Central Bank will all try to follow suit.
“So many are calling recent developments between the U.S. and the rest of world a ‘policy divergence,’ but it is more appropriately labeled a ‘policy convergence,’” Mordy said.
“In other words, the more closely a central bank emulates the Fed and ‘converges’ on the U.S. post-crisis policy road map, the more the market will predict a successful outcome for that country,” he noted.
To U.S. investors, this means the focus on timing the next Fed rate hike is misplaced, and should be instead on the impact this “policy convergence” might have on the global economy in the long run.
US Bond Rally To Go On
Either way, there’s no question that in a world fueled by quantitative easing, U.S. Treasurys should remain the main beneficiaries, Mordy says.
“U.S. bond prices will remain higher than normal, instead of falling in response to stronger economic growth,” he said. “And what’s more, the Fed will face less pressure to tighten monetary policy, because quantitative easing in Japan and Europe will keep U.S. bond yields reassuringly low.”