Our view on rates this week is that the most widely followed indicators are sending different signals, but short term rates are likely to be steady with upward pressure on long-term rates. Increased volatility is likely as the markets adjust to the new qualitative guidance from the Fed.
Here is what we are watching:
Back to the Future
The U.S. added 192,000 jobs in March with the unemployment rate holding steady at 6.7%. Total private payrolls reached 116.1 million, finally surpassing pre-recession highs. Employment numbers were also nudged higher for January and February.
In sum: Moderate improvement in the labor market means that the Fed will continue to gradually reduce stimulus while keeping interest rates low.
It’s the Weather
U.S. exports fell 1.1% in February to hit a five month low causing the trade deficit to widen. This shift surprised most economists who were expecting the deficit to narrow. There were some hints that transport delays related to severe weather were to blame. Oils imports hit a 14-year low – good news for U.S. manufacturers now less dependent on more costly and volatile foreign supplies.
Manufacturing and non-manufacturing economic activity picked up in March, continuing an upward swing. The Institute for Supply Management (ISM) reported growth in new orders, employment and production. Both the overall economy and the manufacturing sector are growing and the rate of change is increasing.
In sum: Economists are racing to reduce Q1 GDP estimates due to lower exports, yet the data show favorable demand and good business conditions. Combined, this is neutral to slight support for higher interest rates.
They Will Definitely Probably Think About It
The European Central Bank (ECB) kept rates steady at .25% and said it was ready to turn on its money-printing machine to avoid deflation. This is significant change and signals their thinking on the strength of economic activity in the Euro Zone. The strong Euro is keeping prices down and too low inflation makes it harder to deal with debt burdens and slow economic growth. The U.S. is tied to the European economy through interest rates, trade, and exchange rates. Any shift can cause the Fed to change its stance. Be skeptical; the ECB has perfected the art of saying one thing and doing nothing.
In sum: Expect no reaction from the Fed to the ECB announcement. If anything, continued weakness in Europe supports lower interest rates.
The Week Ahead
Wednesday, April 9th: The Federal Open Market Committee (FOMC) releases detailed minutes from their last meeting. The markets will look for signs the Fed is keeping rates low following confusion sparked by the Dot Plot and Janet Yellen’s post-meeting remarks.
Thursday, April 10th: Jobless Claims data. This has a big impact on financial markets because it measures emerging unemployment and gauges the strength of the job market. This provides insights into the direction of economic activity.
Friday, April 11th: the Producer Price Index (PPI) This provides markets with insights into the direction of inflation.
Finally, Industrial production data are expected from a variety of big European countries. This will be an indication on the need for ECB to take action (see above).
In sum: All provide insight on economic momentum and indicate the direction of interest rates. Increased jobless claims and a favorable PPI indicate a continued low rate environment. Labor market and price pressure and lack of clarity from the FOMC support higher rates.
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This economic update was brought to you by Steve Papapietro, Mortgage Advisor at Opes Advisors in Palo Alto. For any additional questions about this information or about your mortgage questions, please call him at 650.319.1642.