This Is What Interest Rate Investors Want to Know

Is the economy healthy or isn’t it? That’s the question interest rate investors are trying to answer right now because the answer will determine the next big move in Treasury yields and bond prices.

For several months, there wasn’t even a shadow of a doubt in investors’ minds. Everything was coming up roses for the first time in a long time, driving interest rates and stock prices higher.

Then we got the December employment report from the Labor Department — one that showed the economy created only 74,000 jobs. Not only was that the worst reading since January 2011, it was also less than half the forecast of analysts. The reaction was a swift, sharp correction lower for both rates and stocks.

Initial jobless claims have steadily declined to their lowest levels since 2006-2007.

So should you be concerned? I’ve spent the past several days noodling on that, and I’d like to make my answer as crystal clear as possible: absolutely not.

Let’s start with the jobs picture. There’s a lot of evidence to suggest the numbers were heavily influenced by the lousy weather last month, and the government’s report doesn’t square with one single piece of evidence anywhere else.

First, the ADP employment report for December showed a whopping 238,000 jobs added, the strongest in 13 months.

Second, the outplacement firm Challenger, Gray & Christmas released its latest layoff report, showing that 2013 had the fewest firing announcements from corporate America since 1997.

Third, initial jobless claims have steadily declined to their lowest levels since 2006-2007.

And fourth, the separately tallied unemployment rate slumped again — to 6.7 percent from 7 percent. That’s the lowest since October 2008.

Or what about retail sales?

There was a lot of concern that the holiday season might not live up to expectations. But retail sales rose a better-than-expected 0.2 percent last month after a 0.4 percent gain a month earlier. Stripping out auto sales, you get a rise of 0.7 percent, the highest since last February. A separate “core” reading of sales that goes into GDP calculations surged the most in 18 months.

Separate early reads on manufacturing activity look relatively healthy, and corporate earnings are generally fine. Plus, key Fed policymakers not only waived off any labor market concern, they also said “Damn the torpedoes! QE is going away no matter what!”

Specifically, Philadelphia Federal Reserve President Charles Plosser said Tuesday that he fully supported the move to lop $10 billion off the QE program at the last Fed meeting. He then said that “the default option is continue on this path” and even added “I’d prefer it to be a little faster.”

Dallas Fed President Richard Fisher was even more outspoken. He said he didn’t care if getting rid of QE caused the stock market to tank, he would do it anyway. He also completely dismissed the suspect December employment report, pledging that he “would vote for continued reductions in our asset purchases, with an eye toward eliminating them entirely at the earliest practicable date.”

Long story short? The prescription for investment success that I’ve been laying out for months remains intact:

Avoid almost all fixed-income investments and rate-sensitive stocks. Buy stocks levered to an economic expansion. And continue to look for an end to QE earlier this year, with actual short-term interest rate hikes to begin thereafter.

Until next time,

Mike

P.S. The January issue of Safe Money Report has my top four forecasts for 2014. Plus I’ll give you a bank stock to buy that just took out a level of technical resistance that dates all the way back to late 2007. Click here to join now.