Economic Update QuarterlyLawry Knopp, VP-Funding & Hedging
U.S. Treasury yields remain low as a disappointing March employment report caused investors to question their economic growth projections for 2015. The dollar also weakened as worse-than-forecast payroll data supported the prospect that the Federal Reserve may delay the first increase in monetary policy rates until closer to year-end. While the unemployment rate was unchanged, the report suggests the economy is losing momentum. Compared to year-end, Treasury yields are down 20 to 40 basis points.
Interest rate volatility is expected to continue throughout the year based on uneven economic data. Weaker Q1-2015 growth of 1.5 to 2.5 percent will likely be followed by moderately stronger performance later in the year with second half real GDP growth near 2.8 percent. Recent reports for manufacturing indicate the pace of expansion is slowing, while headline inflationary pressures have eased as oil prices have declined. Anemic global economic growth and low U.S. inflation have caused the market to push out expectations for the Federal Reserve’s first tightening of monetary policy. Housing gains have been moderate as lower mortgage rates have supported home purchases.
The Federal Reserve appears to be in no rush to hike monetary policy rates as first quarter GDP projections have been trimmed and year-over-year overall consumer inflation is near zero. The Fed would like to see further improvement in the labor sector and reasonable certainty that inflation will achieve their 2 percent objective over the medium term before they start to normalize monetary policy. They continue to see the economy as weak and believe it is appropriate for monetary policy to remain accommodative for some time, especially as the strong dollar has been a drag on the economy. Maturing investments continue to be reinvested which maintains prior rounds of quantitative easing.
Job creation and unemployment gains have slowed due to difficult winter weather, weakness in the oil patch and manufacturing surveys showing the pace of expansion slowing. The slowdown in manufacturing activity is related to the stronger dollar which makes U.S. exports less competitive in global markets. Continued improvement in employment is expected, but not to the degree we saw in 2014. The unemployment rate stands at 5.5 percent with economists expecting the jobless rate to decline to 5.2 percent by year-end. Look for limited improvement in the labor force participation rate, which is currently at 62.7 percent, the lowest it’s been since 1978. The low participation rate is partly related to demographics as baby boomers look to retire while others who lost their jobs during the recession have found it difficult to return to the labor market and others remain underemployed. Nevertheless, there is concern over potential labor shortages for skilled labor, which may drive wage costs and inflation metrics higher.
Geopolitical concerns and conflict are increasing. Turmoil in the Middle East is ongoing while Greece and European finance ministers disagree on reforms needed to fix the Greek economy. Tension between the U.S. and Russia is on the rise as saber-rattling on NATO-member borders intensifies. The impact of these issues may be significant down the road, but for now they are more regional than global with limited impact on the U.S. economy except for potentially lower interest rates on flight-to-quality trading.
View on Interest Rates
Elevated market volatility and generally low yields are expected to continue for the next couple months based on low energy prices, persistent concerns over economic growth, uneven economic data releases and potentially weaker equity prices. Short-term rates will likely be driven by anticipated Federal Reserve monetary policy while long-term rates respond to inflation, economic growth, equity market volatility and geopolitical events. The two-year U.S. Treasury yield is expected to finish 2015 near 1.25 percent with the 10-year yield near 2.5 percent.
The above commentary is a summary of select economic conditions prepared for Northwest FCS management. It is being shared as a courtesy. As with any economic analysis, it is based upon assumptions, personal views and experiences of those that provided the source material as well as those that prepared this summary. These assumptions, conclusions and opinions may prove to be incomplete or incorrect. Economic conditions may also change at any time based on unforeseeable events. Northwest FCS assumes no liability for the accuracy or completeness of the summary or of any of the source material upon which it is based. Northwest FCS does not undertake any obligation to update or correct any statement it makes in the above summary. Any person reading this summary is responsible to do appropriate due diligence without reliance on Northwest FCS. No commitment to lend, or provide any financial service, express or implied, is made by posting this information.