The Real Reaction To The Jobs Report Will Come This Week
Summary
- In March, the U.S. stock market tolerated the rise in long-term interest rates as long as it was not disorderly or too quick.
- The 10-year Treasury rate traded all the way up to 1.77% last week, and we may very well surpass that level this week as investors take time to react to strong March jobs data.
- On the present trajectory, we are on track to surpass 2% in 2Q'21.
Friday brought a great March jobs report on a day the stock market was closed for the observance of Good Friday and the beginning of the Western (Non-Orthodox) Easter weekend. Easter for Orthodox Christians will not come until May 2. The difference arises from the latter using the Julian Calendar (adopted by Julius Caesar in 46 BC), while the West uses the Gregorian calendar.
The futures markets reacted violently to Friday's jobs data for the short time they were open after the release. In that market, stocks registered fresh all-time highs, while government bonds again sold off.
The tone of trading in March was that the U.S. stock market tolerated the rise in long-term interest rates as long as it was not disorderly or too quick. The 10-year Treasury rate traded all the way up to 1.77% last week, and we may very well surpass that level this week as investors take time to react to the jobs data.
On the present trajectory, we are on track to surpass 2% in 2Q'21. From a historical perspective, the Fed decided to peg the 10-year Treasury at 2.5% or lower in the 1940s to facilitate the war effort, which in effect meant facilitating deficit spending that otherwise the bond market could not stomach on its own.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
While defeating Nazi Germany and its allies was a political motivation that made deficits acceptable in the 1940s and gave the Fed a mandate to intervene in the interest rate markets, I am not sure Democrat-sponsored deficit spending that goes well beyond dealing with the effects of the COVID pandemic is. It remains to be seen what the Powell Fed will do, but so far, I get the feeling they expect market forces to keep Treasury yields under control, as there are simply no yields to be had in either Japan or the eurozone.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The 10-year U.S. Treasury yield has been declining since 1981. Any interest rate spikes that become disruptive to the pending economic recovery may cause President Biden to suffer the fate of his friend Barack Obama, who lost Democratic control of the House in 2010 and the Senate in 2014. Without the now-razor-thin control of the Senate and House, President Biden will have a very hard time governing in 2023. Having been a Senator himself, this must surely be on his mind as he rolls out his policy agenda.
All content above represents the opinion of Ivan Martchev of Navellier & Associates, Inc.
Disclosure: *Navellier may hold securities in one or more investment strategies offered to its clients.
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