On Monday, we learn that consumer sentiment is the highest since the end of the Great Recession.
On Tuesday, we’re told that Americans’ fear of hunger, eviction and foreclosure are at record highs.
On Wednesday, a new analysis tells us that GDP is expected to grow by 6% in the 1st quarter of 2021.
On Thursday, an article shows that over 10 million people are still unemployed, with tens of thousands of restaurants and bars permanently closed.
And on Friday, one strategist suggests that the stock market will grow by another 30% this year.
Another one says that because stock prices are so overpriced relative to earnings the market is due for a major correction.
Quite a week, eh?
Neil Irwin asks: “When does a report showing a booming job market cause recession alarm bells to start clanging?”
His answer: “When exceptional jobs growth leads bond investors to bet that the Fed will raise rates so aggressively to quash inflation that it will be forced to reverse course later.” That's what happened on Friday.
When the bond yield curve inverts, as it did Friday, it usually means a recession isn’t too far behind.
And although that's being a tad presumptuous at this point, it's clear the Fed is walking a narrowing tightrope.
The Labor Department’s March employment data was strong again, with 431,000 jobs added, positive revisions to January and February numbers and a slightly falling unemployment rate.
More Americans are rejoining the labor market, and wages are showing steady growth.
Just two weeks earlier, Fed chair Jerome Powell said that he sees a "very, very tight labor market, tight to an unhealthy level."
The new numbers, however, suggest it’s becoming even more so, especially around the government’s headline unemployment rate.
That means the jobs numbers amount to full speed ahead for more aggressive Fed tightening, including what looks likely to be the first half-percentage point rate hike in 22 years at the early May policy meeting.
That's why the jobs numbers caused an 8% jump in 2-year Treasury yields, to 2.46% from 2.28% heading into last weekend. Longer-term yields rose by less, with the 10-year ending the day at 2.38%.
When long-term rates are lower than their short-term counterparts, that's called an inversion or an inverted yield curve, to be more precise.
It’s like bond investors are betting that the Fed will end up reversing those near-term rate hikes down the road (i.e., lowering them…again), presumably because of a weakening economy.
The average mortgage rate is up 80bps or 50% in just over one week. As a result, applications for a mortgage are now roughly half the level they were one year ago.
Homebuilder sentiment is at a two-year low. And online real estate companies Redfin and Compass have announced layoffs of 8% and 10% of their workforces, respectively.
What can go wrong in the housing industry?
Matt Phillips is right when he observes that “the debt ceiling circus has arrived in D.C.” and it’s not going away anytime soon.
He writes today that the closer the federal government gets to “stiffing creditors” and going into an unprecedented default, “the bigger the implications will be for the markets and the economy.”
As I wrote in Friday’s article, the government hit its $31.4 trillion debt limit last Thursday.
While that’s a big deal, it’s nothing compared to what will happen to financial markets if the government defaults sometime mid-year.
For now, it just means the Treasury Department has to start using "extraordinary measures" – like drawing down its cash balances and deferring contributions to government pension funds – to keep paying its bills.
Treasury Secretary Janet Yellen told Congress that her department can keep juggling payments at least until June.
Markets don't appear to be overly worried at this point. But just wait. As Phillips points out, the longer the debt ceiling drama plays out — and the closer the government comes to default — the crazier markets will get.
That's exactly what happened in the summer of 2011, when we last came perilously close to the Thelma & Louise Driving Over the Edge moment into the abyss.
That year, as the crisis got worse into July and early August, the S&P 500 plummeted 15% and credit spreads that determined costs for home mortgages and corporate borrowings surged.
That jump came as investors grew leery of lending in the face of growing risk and uncertainty.
On the other side, those who say they want to cut government debt levels will likely claim that the turmoil the debt fight raised over a decade ago was worth it – despite the U.S.’s lowered credit rating.
They point to the Budget Control Act of 2011 that resulted from that debt limit fight, which helped cut federal budget deficits in subsequent years (note that it hasn’t actually helped cut the national debt, an important distinction).
So, however it turns out, the fight over raising the debt ceiling and avoiding default is going to hang over the markets for a good chunk of the year.
And, at least for investors, according to Phillips, “it's likely to be a bummer.”