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Stocks Fall, Yields Fall, Unemployment Doesn't!

There is a lot of buzz on the US economy and financial markets this morning. And the news is like a punch to the kidney. Unless of course you are refinancing your home or on the hunt for a new one. But, I will get to that in a moment.

The morning began with China's PMI (Purchasing Manager's Index) falling to 50.4 in May, resulting in the worse number this year. A number below 50 is a sign of contracting or decelerating growth. HSBC's measure of China's factory sector contracted for a seventh straight month to 48.4. This might result in China cutting its reserve ratio or exploring more fiscal spending (maybe some form of QE). Both present real problems, since China does not want to increase inflation more than necessary.

Then came the US jobs report. Economists expected 158,000 new jobs to be created for the month of May. However, the economy added only a paltry 69,000 new jobs causing the unemployment rate to bounce to 8.2 percent. This is the first jobless rate increase in nearly a year. Labor force participation remains near 30-year lows. And, not to beat a dead horse, but the rate of "discouraged workers" increased to 14.8 percent from 14.5 percent in April. Its obvious the economy has come to a stall on job growth, but how bad is it? Well, to put things into perspective, most economists believe we should be adding anywhere from 150,000 to 200,000 jobs per month just to keep the unemployment rate flat. And, we should have more jobs than when the recession began because more people are entering the workforce as they reach the working age each month.

Additionally, there is big concern about the drop in the 10-yr US Treasury yield. This well known and followed yield sank below 1.5%, a drop to all time historical lows. So what does this mean? Well, the 10-year is so important because it is used by economists as a leading indicator of the growth and stability of the economy. This would suggest that the signs are still very grim. There is hearsay that the government could implement another round of bond purchasing from the Federal Reserve. A concern, however, with such a move is sending the US economy into a period of stagflation. Stagflation occurs when growth slows while inflation simultaneously quickens. This would be a dilemma for policymakers since rates would continue to be depressed with no where to go. Rates can't go much lower and the Federal Reserve would be left with only "hope" in its arsenal. Hope that growth will eventually pick up and inflation won't run a muck.

10 Year Treasury Rate Chart

Source: US Department of Treasury

Lastly, let me end with some potential good news. Despite stock prices are in free fall, treasury yields are declining... Wait! That's it! Treasury yields declining can be a good thing, at least for those looking to make a big purchase or refinance a big purchase. The biggest purchase most people make in their lifetime is their home. And now, is a great time to look at what interest rate you are paying. Go ahead and dig up your mortgage statement and while you are at it, consider finding any other financial statements that are tied to a debt, ie. auto, boat, home appliances. Right now, you have the ability to finance a 30 yr fixed mortgage for as little as 3.56%. Consider that for a moment. Borrowing someone's money at 3.56% for 30 years. That's unheard of and if you ask anyone from 'Generation X' if they thought that sounded good, I bet you'd get an astounding - Yes!

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