If you're a bond investor, maybe you should be praying for impeachment after last Friday's November jobs report.
Granted, based on other indicators, including GDP, leading indicators, and others, the economy is not as strong as it was at the beginning of this year. But it’s still in pretty good shape, as witnessed by the 266,000 jobs that were added to the economy last month.
The immediate reaction in the bond market was a sharp drop in prices and a concomitant rise in bond yields. In other words, good economic news is bad for bonds. By the same token, a strong economy pretty much squashes the idea of the Federal Reserve lowering interest rates anytime soon, which is also negative for bond prices. If anything, if this keeps up, the Fed’s next move may be to raise interest rates again, not lower them, which is the prevailing view in the financial markets at the moment.
So that would indicate that the bond investors’ best hope is for the Democrats to be successful in impeaching Trump and as quickly as possible and push the economy in the other direction.
Of course, as some of us might remember from our junior high civics or American government class (do they still teach that in schools?), impeachment is not the same thing as removal from office. President Clinton and President Andrew Johnson were both impeached, but neither was removed from office, having prevailed in the subsequent trial in the Senate. (That’s the part most giddy news stories about the current impeachment drama leave out). But then again, the entire Democrat strategy is really about generating as many headlines as possible with the words “Trump” and “impeachment” close together, as if that’s good enough.
So impeachment isn’t such a great political or electoral strategy. Neither is it a good bond investment strategy.
Let's get back to the jobs reports, which was described variously as a “blowout” or “blockbuster” or words close to that.
Nonfarm payrolls expanded by 266,000, nearly 90,000 more than the consensus Street forecast of 180,000 and 56,000 more than the most bullish individual estimate of 210,000. It was also 110,000 more than the 156,000 jobs created in October, which was itself revised upward by 28,000 over the original figure.
Meanwhile, the unemployment rate – which is what most people on Main Street, not Wall Street, understand best – fell to 3.5%, a 50-year low. Wages rose by 3.1% compared to a year earlier.
While the overall economy has softened a little in recent months, that’s not true of the jobs market, which has never really lost steam. Employers have added an average of 205,000 people to their payrolls over the past three months, including November, which is up from the pace set earlier in the year, although below the 223,000 per month for the same three months of 2018.
About the only thing some pundits could come up with to downplay the jobs report was that with so many people working and getting hired and so few jobs left to fill, that means the jobs market can only get worse. That’s not a whole lot to hang your hat on if you’re hoping the economy goes into a dive.
For example, under the ominous headline, “The consequences of ultra-low US unemployment” in the Financial Times, Gavyn Davies the former head of the global economics department at Goldman Sachs and former chairman of the BBC, writes, “In past cycles, a decline in unemployment below its natural rate has often been a signal that wage pressures are rising, quickly leading to higher price inflation and tighter monetary policy. This should worry both the Federal Reserve and the financial markets. Ultra-low unemployment in the late 1960s eventually led to much higher inflation, when Fed Chairman Arthur Burns was pressured by the presidential re-election campaign in 1972. That turned out to be a major, inflationary mistake. Chairman Jay Powell will not want to let President Donald Trump lead him down the same dangerous path.”
Actually, I’m waiting for someone to accuse Trump of pressuring the Labor Department to falsify the numbers to make them look better than they are, much like former General Electric CEO Jack Welch accused the Obama Administration of doing back in 2012.
Meanwhile, the Democrats’ drive to remove the prime mover of this vast improvement in jobs continues. But you can’t really blame them since this is about the only strategy they have to try to win next year. Unless you think hoping for a weaker economy and more unemployed people is a winning campaign message. It’s definitely not a winning investment strategy.
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George Yacik
INO.com Contributor - Fed & Interest Rates
Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.
