What the recent labor reports mean to interest rate futures
February 6, 2010 by admin
Following the stock market over the past six weeks could quickly leave the average investor searching for the nearest exit. The dramatic rally the markets experienced from March of 2009 through the end of the year was built on confidence that the economy would not totally collapse and the economic recession would eventually come to an end. The New Year has started with a much higher degree of scrutiny for timing the economic recovery and predicting future growth. Following a disappointing labor report for the month of December and overall skepticism the stock market lost nearly 6% during the month of January. Economists and financial experts were quick to pile on the train of doom and gloom, proclaiming months of additional challenges for the overall economy and thus dampening the hopes of a speedy recovery in the New Year. Yields on the closely followed ten year Treasury bond dipped by almost twenty basis points last month, bringing mortgage rates a bit of extra relief.
Friday’s jobs report was a tell tale sign of what we might come to expect in 2010, mixed reports bringing out extreme volatility in the markets and sending more investors to look for safer and more stable avenues to direct their monies. The labor report showed a significant drop in the national unemployment rates and the smallest number of job losses in over one year. Investors appeared to be taking the news in stride in early trading, but fear eventually led to a significant market selloff during midday trading, sending the DOW to its lowest levels in the last ninety days, prior to a surge in late trading to see a complete recovery in the markets. The trading closely resembled much of the action the markets witnessed exactly one year ago as investors are clearly scrambling to try and find direction to the economy and markets. The labor report was certainly an improvement over the month of December, but prognosticators were quick to point out that there were some large gaps in growth and that nearly nine million people have now lost their jobs since the beginning of the recession.
The real question is how does the FOMC interpret the data and what is the future of interest rates. In short, while the numbers were an improvement it is hard to imagine that this sold report will lead the Fed to make any changes in policy in the near future. There simply remains too many obstacles to raising interest rates in the short term and inflation remains quite contained. Worth following will be whether the improved figures help to loosen the banking industry to start sending money out into the markets in the form of loans. The spread on borrowing from the Federal Reserve remains quite attractive and should hold true for a minimum of the next six months. A boost in lending would certainly benefit the market and economy and help improve the labor markets at a faster rate.