All eyes were on the big job report this week. Traders were eager to see if it would be strong enough to expedite the schedule for major policy changes that would have a big impact on rates.
The bond market, and indeed many homeowners, remember 2013 2013 Taper tantrum all too good. For those in need of a refresher, the taper tantrum occurred after the Fed began tapering the bond purchases that had kept rates low. Prices skyrocketed in one of the fastest moves in history.
With the Fed still purchase $ 120 billion per month in government bonds and mortgage-backed bonds since the pandemic began, traders know there will be one day another bill. Fed spokesmen have clearly stated that this time they will give ample warnings, but no one wants to be late for this party! Therefore, traders are constantly dissecting all incoming economic data for early warning signs.
First among these data is the Big Jobs report (officially the Bureau of Labor Statistics’ “employment situation”). No other report is equally recognized for its ability to guide policy and trade decisions.
As the number of Covid cases decreases and vaccinations increase, the local economy is quickly moving back to more normal activity levels. Traders expected this activity to show up in the data. however, the turning point was not so clear in the large job report.
The second most important report this week, the monthly service sector activity index published by the Institute For Supply Management (ISM), has just hit an all-time high. The higher it is, the faster the economy grows.
In addition, several other work-related reports during the week showed continuous improvement. Particularly noteworthy was the long-standing, but still quite obscure “Job Cut Report” by the Challenger, Gray and Christmas personnel agency. It hit his lowest level in 2 decades last month and essentially kept it in the last report.
The weekly data tells the same story, with jobless claims hitting another post-pandemic low.
Even if we read the headline from the Big Jobs report (559,000 new jobs created last month against only 278k in the previous month) it seems like everyone is on the same page and we should be increasingly concerned about the Fed. But the catch is, the market should have seen a number closer to 1 million to really freak out. As it stands, 559,000 didn’t even hit the median forecast of 650,000.
If we look at a minute-by-minute breakdown of the response to the job report, we can see how nervous both sides of the market were. Stocks and bonds (also called “rates”) improved almost immediately and quite significantly.
And if we zoom out a bit, we get the impression that this isn’t the first time stocks and bonds have moved in this symmetrical pattern – they improve together as expectations for Fed support improve and together lose out Bottom if Fed support seems less secure.
We’re only using stocks in the charts above to illustrate a point on how the entire financial market is responding to the Fed’s prospect of adjustment. The bond market is crucial for interest rates, and the The big picture is pretty clear: Despite short-term volatility, we remain in an “intermediate phase” after interest rates rose at the beginning of the year.
Side note: Mortgage rates didn’t go the same way as government bonds, but it was exception a generally well-behaved rule. While we may still see small deviations from this rule, the big divide from 2020 is now fixed. Translation: It is once again okay for mortgage rate watchers to keep an eye on government bond yields.
What does this week’s job report mean for the tariffs? That means we can sing and dance the same song next month, if not sooner! The job report data was collected over 3 weeks ago and things are changing fast. Every new update on the labor market carries the risk that the Fed Taper Talks will become a reality. We can look forward to these near-term rate rallies, but other than one major economic stumbling block, the pause is more likely to give way to another uptrend.