The prices were excellent at the beginning of the week but that changed on Wednesday. We were already good on the way to 3 week highs on Thursday and Friday it became official.
Notably, these 3-week highs are still historically low.
Fridays Main source of drama was the Department of Labor’s strong job report. The unemployment rate fell from 5.9% to 5.4% and thus clearly exceeded the expectations of 5.7%. This was achieved despite the fact that the number of Americans who considered themselves part of the workforce increased by 0.1% (a statistic sometimes used to offset changes in the unemployment rate).
The job report is always important, but this and the next are particularly important. They provide two important data points that help determine when the Fed will decide to taper its bond purchases. All other things being equal, this would put interest rates under pressure.
A member of the Fed gave some concrete figures In front the job report which says we would need to see around a million new jobs in the next 2 reports to justify reducing the September 22nd announcement. At 943,000 with a further 88,000 upward corrections from the previous month, this was close enough to keep the discussion open.
There are other wayHowever, look at the number of jobs. Cumulatively / explicitly, we see that the labor market still has a long way to go before it reaches the number of jobs before the Covid disease again.
The Fed is aware of this – as are the markets. You are ready to rejuvenate Good before this loophole is closed. All they need to see is the “substantial further advances” that continue to be mentioned in official Fed releases. This is why the bond market responded so readily to the data.
In terms of the yields / interest rates on 10 year government bonds (a model for longer term interest rates like mortgages) there is two ways to see this week’s rate hike. The first would be as a breaking out from the downward trend of the last few months.
The second would be as a return to the top of the last row.
There are no way of knowing which of these options will prevail in advance. Traders are well aware of the Fed’s considerations about tapering. They’re eagerly awaiting a clarification from Powell at the Jackson Hole Symposium later this month, and they’re far better prepared to rejuvenate this time than they were in 2013 when it became one fixed Jump in prices.
Ultimately, the Fed’s course or action b. The data will depend on many factors including an unknown path for the pandemic (and pandemic-related guidelines at the state and local levels).
Bottom line, stronger data increases interest rate risks, but uncertainty about Covid and its impact on the economy could push back in the other direction. We’ll get an indication of market trends next week, but we’ll ultimately wait and see how the Covid numbers and economic data play out when much of the country is back to school. That puts the next month or two under heavy strain in terms of potential interest rate volatility.