Personal Finance Blog By MoneyRates

Strong jobs report kicks off pivotal month for savers

July 9, 2014

| Senior Financial Analyst, CFA

The World Cup tournament represents roughly a full month's worth of action, with a busy slate of games bringing one dramatic development after another. July might prove to be a similarly action-packed month for economic news -- with the nation's savers one of the potential winners.

July kicked off with an encouraging announcement on employment growth, and by the end of the month, there should be a clearer picture of whether interest rates on savings accounts are finally ready to start heading higher.

Key economic announcements for depositors

With low interest rates being very much a function of the chronically weak economy since the Great Recession, the fortunes of interest rates and the economy overall are very much intertwined. Here are some of the key economic announcements slated for July that could impact interest rates on savings accounts and other deposits, as well as mortgage rates:

  1. Employment. On July 3, the Bureau of Labor Statistics announced net employment growth of 288,000 for June, making it the fifth consecutive month in which new jobs topped the 200,000 mark. After years of only sporadic growth, this is the most consistently strong run for the job market since before the Great Recession.
  2. Inflation. On July 22, the Bureau of Labor Statistics will announce the change in the Consumer Price Index for June. The backdrop here is that inflation has been accelerating over the past three months. If this continues, not only could it force interest rates up, but it might influence the Fed to be less cautious in unwinding its bond purchase program.
  3. Second-quarter GDP. July 30 will bring the initial estimate of second-quarter GDP growth. After the first quarter's steep drop in economic activity, this could be a pivotal announcement -- though after the first quarter's initial estimate was so far off the mark, it is also an announcement that should be taken with a grain of salt.
  4. Fed policy. July 30 will also bring the end of the next Fed meeting, which should tell us whether any or all of the above has caused any shift in monetary policy.

Just looking at the calendar, there is nothing unusual about this slate of announcements and events. However, it happens that all relate to economic developments that appear to be reaching tipping points of one type or another, and that's what gives this July the potential for special significance.

Outlook for interest rates

Despite the run of strong employment news, and despite the steady rise of inflation, interest rates on savings accounts have not budged so far this year, and current mortgage rates are 36 basis points below where they ended 2013. As with goals in a World Cup game, upward movement in interest rates may take a long time coming and may be the result of a steady build-up of cumulative pressure.

When they finally come though, those interest rate increases, again like World Cup goals, could be dramatic and decisive, so stay tuned to the action in July.

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The biggest threat to the housing recovery

June 26, 2014

| Senior Financial Analyst, CFA

Last Sunday, the U.S. men's soccer team saw a possible victory over Portugal disappear in the final seconds of a World Cup game. That kind of sudden, cruel twist has also become common in the economy over the past several years.

For that reason, despite a run of positive economic news that most recently includes a surge in new home sales, you have to be prepared for the possibility of a setback. If all goes well, the economy could be on track to restoring housing values, putting people back to work and bringing interest on savings accounts and other deposits back to a respectable level. But there are still plenty of factors that could disrupt things.

New home sales rise

The economy has been on a roll lately, and on June 24 the Census Bureau and Department of Housing and Urban Development announced that new home sales had surged by 18.6 percent in May. This gain is especially significant because housing sales had been essentially treading water over the prior year up to that point, and it remained to be seen whether the housing recovery was strong enough withstand last year's rise in mortgage rates.

This announcement puts May's new home sales 16.9 percent ahead of where they were a year earlier, despite the fact that current mortgage rates are about 60 basis points higher than they were in May 2013. In other words, the housing recovery is finally showing some staying power.

Couple this with strong employment growth in recent months, and things are going well. Where could an upset come from?

A stealthy attack

In that U.S. men's soccer game, the late counter-attack that led to Portugal's equalizing goal seemed to come out of nowhere. But the source of the scoring pass should have been no surprise -- it came from Cristiano Ronaldo, the reigning world player of the year.

Similarly, though economic upsets often take people by surprise, the source tends to be something that should have been somewhat predictable. In this scenario, the most likely suspect -- the player to keep your eye on -- may be inflation.

The inflation rate has already increased in each of the past three months. Now with conflict in the Middle East widening, higher oil prices could put more upward pressure on inflation.

While the Federal Reserve has been concerned about inflation being too low, higher inflation from rising oil prices would not be the solution they would like. Rather than being a sign of rising demand, it would represent the kind of commodity inflation that squeezes consumers and businesses alike, and ultimately suppresses broader economic activity. As for savings accounts, their interest rates might rise in such a scenario, but probably not enough to keep pace with inflation.

So, from home sales to employment, things seem to be going well for the economy. But keep your eyes on inflation. If something is going to mess this up, it's as likely a culprit as any.

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May employment figures raise hopes for higher deposit rates

June 12, 2014

| Senior Financial Analyst, CFA

It is no secret that a weak economy is largely to blame for today's low interest rates on savings accounts and other deposits. On the whole, things have not gotten any better so far in 2014. However, the most recent employment report suggests that things may be turning around for the economy.

While that does not augur an immediate improvement in savings account rates, it does set the stage for rates to move higher eventually -- if the recent employment trend can continue.

Turning the economy around

The economy began 2014 on a sour note. Job growth in both December and January was sub-par, and real GDP growth turned negative in the first quarter, according to the most recent estimate from the Bureau of Labor Statistics (BLS). This raised the possibility that the economy might be slipping back into recession.

However, the employment trend more recently suggests that the economy is growing again. On June 6, the BLS released its monthly jobs report for May. While job growth during the month did not represent a dramatic breakthrough, May was the fourth consecutive month in which net job creation exceeded 200,000. That might seem like a modest achievement, but the last time there have been so many months in a row with 200,000 or more new jobs, Bill Clinton was in the White House.

This job creation figure is an especially significant economic indicator. For one thing, it is more meaningful than the percentage unemployment rate, because that is affected by how many people are officially looking for work. If job growth stays strong for long enough, the unemployment rate will take care of itself. Also, job creation is not just a sign of economic health and optimism, but it represents new fuel for the economy, in the form of paychecks for all those people going back to work.

Calming the Fed?

With the Federal Reserve's Open Market Committee meeting next week, it will be interesting to see if job growth and other economic data have been strong enough to calm a recent worry of both the Fed and the European Central Bank, which is deflation.

For most of recent history, the Fed's concern has been with keeping a lid on inflation. Now, however, they are concerned that it is too low. Deflation is not only a sign of anemic pricing power, but it can also become part of an ugly spiral as consumers defer purchases in hopes that prices will be lower in the future. However, with rates on savings accounts near zero, the last thing depositors want is a campaign to artificially pump up inflation while the economy itself is still sputtering.

Hope for savings accounts?

If higher inflation with a weak economy represents the lose-lose scenario for savings accounts, the win-win would be faster growth with low inflation. The last time the U.S. saw that combination of conditions was in the late 1990s. Perhaps the recent stretch of 1990s-style job growth is a sign that this history can repeat itself.

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Making sense of the dip in mortgage rates

May 29, 2014

| Senior Financial Analyst, CFA

After falling a little in April, mortgage rates fell further during the first four weeks of May to reach their lowest levels since last October. Is this the beginning of a trend -- or one last opportunity for consumers to capture low purchase or refinance rates on mortgage loans?

Current mortgage rates are still higher than they were a year ago, but have now fallen by more than 30 basis points since 2014 began, and by more than 40 basis points since peaking last August.

Mortgage rates and Treasury bonds

Treasury bonds can be a good barometer for mortgage rate conditions. Like mortgage rates, Treasury yields represent a long-term interest rate commitment, and thus are sensitive to many of the same economic conditions. But since Treasuries are traded daily in huge volume on open markets, they can provide a little more immediate feedback about those conditions than mortgage rates.

So far in May, Treasury yields have reinforced the recent trend in mortgage rates. Through May 23, yields on 30-year Treasury bonds had fallen by 12 basis points since the end of April, while yields on 30-year mortgage rates had dropped by 19 basis points. Given that April ended with disappointing news about GDP growth in the first quarter, a slide in long-term interest rates might seem to make perfect sense -- save for some lingering questions about inflation.

The inflation conundrum

The first issue with inflation is the recent trend. Recent months have seen the rise in the Consumer Price Index go from 0.1 percent in February to 0.2 percent in March to 0.3 percent in April. The 12-month rise is still just 2.0 percent, which is not troubling, but long-term interest rate commitments, such as mortgages and Treasury bonds, are normally so sensitive to inflation that you would not expect to see their rates falling while recent inflation numbers are rising.

It is possible that mortgages and Treasuries are anticipating weaker inflation due the slowdown in economic growth. This raises a bit of a conundrum though: The Federal Reserve has recently cited concerns about low inflation as a symptom of economic weakness, intimating that it might act to bring the inflation rate up in response. If the Fed plans to react to economic weakness by boosting inflation, that weakness may not be a good basis for mortgages and Treasury rates to anticipate lower inflation.

Another wave of refinancing?

In the meantime, low mortgage rates are good for prospective home buyers, and refinance rates may be getting low enough to touch off another wave of refinancing.

While refinance rates are not as low as they were a year ago, there is in effect a whole wave of homeowners who bought during the housing boom and are only now seeing property values recover enough to qualify for refinancing. After such a long wait, those homeowners may want to act on a mortgage rate opportunity that may not last long.

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Will stronger job growth finally rescue savers?

May 15, 2014

| Senior Financial Analyst, CFA

Employment growth had a strong April, and now has logged three consecutive good months. Is this the breakthrough that could eventually rescue interest rates on savings accounts and other deposits?

In its most recent Employment Situation Report, the Bureau of Labor Statistics reported that the U.S. economy added a net total of 228,000 jobs during April. In addition, this report included upward revisions to the February and March employment estimates totaling 36,000 new jobs, putting job growth for both months above the 200,000 mark as well.

New jobs had averaged just 190,000 a month over the past year. Also, after job growth had slowed to 84,000 in December and 144,000 in January, getting back above 200,000 new jobs a month is a definite step in the right direction.

A sluggish recovery

Some economic recoveries are all about confidence -- getting people to believe that it is safe to spend money again. This one, though, is more about reality than perception. Unemployment has been stubbornly high, and consumer balance sheets are still over-burdened with debt. Job growth can change that reality, by putting more people back to work and by creating sufficient demand for labor to drive wages higher.

This is why job growth is such a crucial economic indicator to watch -- and why job growth has been the poster child for the stop-and-start economic recovery. Fading job growth was an early clue to the slowdown in economic growth toward the end of last year. Perhaps the recent resurgence in employment is an indication that the economy will regain its momentum as spring turns into summer.

The interest rate train

Rising employment and renewed economic activity should be good for interest rates on savings accounts, money market accounts and other deposits -- eventually. However, those accounts can be thought of as being at the very end of a long-train of interest rates -- they are going to arrive at higher rates last.

Long-term interest rates, on things such as Treasury bonds and mortgages, are likely to react to changing interest rate trends first. This is because they represent commitments that stretch out for many years into the future, so it would be very costly for issuers to get caught with substandard rates. Their long-term nature makes these vehicles likely to anticipate rather than react to changes in the interest rate environment.

Interest on savings accounts and other deposits, on the other hand, is likely to react to a change in the trend only after it is well-established. For one thing, these rates can change at anytime, so there is no urgency to try to anticipate long-term trends. Also, banks are currently awash in deposits. They have no trouble attracting deposits, so why pay more for them?

Only when economic growth is more firmly established will it create the demand for capital that will encourage banks to raise deposit rates. Only then will the back of the interest rate train arrive at the station.

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