April jobs report: a prelude to higher rates?

May 09, 2013

| MoneyRates.com Senior Financial Analyst, CFA

One thing that has made the recent economy so challenging is its unpredictability. The latest twist was actually a positive one -- a surprisingly encouraging jobs report at a time when the economic recovery seemed to have lost momentum.

On March 3, the Bureau of Labor Statistics reported that 279,000 new jobs had been created, between the employment growth for April and upward revisions for previous months. Employment growth in April was responsible for 165,000 of those new jobs.

Upward momentum for jobs

While 165,000 is slightly below the monthly average of 169,000 for the past year, the number was encouraging because it exceeded expectations and represented a strong improvement over the original figure for March, which was just 88,000 new jobs.

That original March figure was revised upward by 50,000 in the latest report, and February's figure was revised upward by 64,000 new jobs. Add these revisions to April's job creation, and the total comes to over a quarter million new jobs in the latest report.

The stock market climbed to new highs within days of the job news, and the bond market also reacted to the renewed hopes for the economy. Bond yields jumped immediately on the employment news, and then continued to climb in the days that followed.

For bank customers, this could have a variety of long-term ramifications. It raises hopes for savings accounts because stronger economic growth should eventually mean higher interest rates. By the same token, the prospect of higher rates means that current mortgage rates may be a limited-time-only bargain for potential home buyers, as well as homeowners who want to refinance.

The economic road ahead

Is this the turning point that will see economic growth finally accelerate? Given that unpredictability has been the one true defining feature of this economic recovery, it is too early to say. However, it is not too early to prepare for what might happen if that's the case.

Stocks may continue to rise if growth strengthens further, but keep in mind that if interest rates start to rise, it will create a bit of a headwind for stocks. With the market having already rallied by 15 percent so far this year, it's biggest move may have come in anticipation of better news, leaving less potential for further gains should the economy actually improve.

Savings accounts should eventually see higher rates if bond yields continue to rise, but expect banks to lag behind the bond market at a cautious distance. Banks may be quicker to raise mortgage rates, since current mortgage rates are so low they represent a risk to banks if interest rates start rising.

Before any of this plays out, however, the economy will have to prove it can sustain this momentum. The next jobs report, due in early June, will be a key indicator. In the meantime, the latest news remains a positive twist rather than a definitive turning point.

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