200,000 new jobs created in January – wages rise at highest pace since 2009 – The Bureau of Labor Statistics reported that U.S. employers added 200,000 new jobs in January. That beat experts expectations of 180,000. The unemployment rate held steady at 4.1%. Wages were the highlight of the report, as average hourly wages rose 2.9% compared to one year ago. It was the largest year-over-year increase since 2009. December 2017’s average hourly rate was 2.6% higher than last December, so a 2.9% increase took experts by surprise.
Stocks posted their worst week since January 2016 – After four straight weeks of gains, stocks gave up much of those gains for the year in the first weekly drop for U.S. indexes in 2018. Most of the concern this week centered around the prospects of higher interest rates, which increase borrowing costs for corporations. Key developments were: The administration has begun to institute some tariffs on some goods imported to help U.S. manufacturers. So far it’s mainly solar panels and washing machines, but analysts feel there will be more products added. This was very positive for U.S. companies that make solar panels and washing machines, but is expected to increase the cost of those items to consumers. As more items get added that increases costs of those items, which increases the prospect of higher inflation. Higher inflation leads to higher interest rates. Later in the week Jay Powell, who was confirmed last week as the next Chairman of the Federal Reserve, who is replacing Janet Yellen, made comments which seemed to signal that he will be more hawkish on increasing short term interest rates. Finally, on Friday the January jobs report suggested that wages were beginning to rise at a more healthy rate. That will give people more spending power and also increases the risk of inflation, which will put even more pressure on The Fed to raise rates. The Dow Jones Industrial Average closed the week at 25,520.96, down from last week’s close of 26,616.71. After dropping 4.1% this week, it’s still up 3.2% year-to-date. The S&P 500 closed the week at 2,762.13, down from 2,872.77 last week. It lost 3.9% this week, but it’s still up 3.3% year to date. The NASDAQ closed at 7,240.95, down from 7,507.77 last week. It dropped 3.5% this week, but it is still up 4.9% year-to-date.
Treasury Bond Yields – Bonds reacted negatively to the wage increase in the jobs report on Friday and rates surged for the day, as higher wages lead to higher inflation. It’s possible bond yields will settle a little lower as the numbers digest. Obviously, future months year over wage comparisons will determine if January’s increase is a trend or was just an outlier. The February jobs report will now be highly anticipated by bond investors. The 10-year treasury bond closed the week yielding 2.84%, up sharply from 2.66% last week. The 10-year reached the highest level since 2014. The 30-year treasury bond yield ended the week at 3.08%, up from 2.91% last week. We watch bond rates because mortgage rates follow bond rates.
Mortgage rates higher this week – Although rates are at the highest level in one year, they are still near historic lows. The February 1, 2018 Freddie Mac Primary Mortgage Survey reported that the 30-year fixed mortgage rate average was 4.22%, up from last week’s 4.15%. The 15-year fixed was 3.68%, up from 3.62% last week. The 5-year ARM was 3.53%, up from 3.52% last week. Rates were even higher on Friday, so I’d expect them to be slightly higher again next week. This was after the jobs report showed that wages rose 2.9%, year-over-year in January, the fastest pace since 2009. Although it’s healthy for wages to rise they have been very stubborn for several years. While this was good news for the economy, it raises the prospect of inflation which has been very tame. Higher inflation causes interest rates to rise.