Today’s update on initial jobless claims deals another blow to the notion that the Federal Reserve will lower interest rates any time soon.
The Labor Department reported this morning that workers filing for unemployment benefits for the first time dropped to 299,000 last week. That’s the lowest number of weekly filings since last July 22.
The evidence, in other words, is mounting that the economy isn’t as weak as previously thought. The outlook adjustment promises to weigh heaviest on the bond market, which seems to be rethinking the appropriate level of yield on the benchmark 10-year Treasury. As of yesterday’s close, the 10-year traded at 4.68%, up from 4.43% on December 1.
But while there’s a rising suspicion that long rates should be higher, the consensus on the short end of the curve hasn’t budged much relative to recent history. Fed funds futures still anticipate that the Fed will continue to keep rates unchanged at 5.25% when the FOMC meets at the end of this month to consider the price of money anew.
In other words, long rates appear to be headed higher while short rates are expected to hold steady. The inverted yield curve, as a result, may be living on borrowed time. That’s perfectly logical if the economy is poised to hum along for the foreseeable future. Inverted yield curves are said to be an early warning sign of recession. But it’s getting harder to reconcile the recent inversion of the curve with the economic data coming forth.
Stepping back and surveying the bigger picture suggests that slower economic growth is still likely. But the odds for recession are fading. Nonetheless, it’ll take another month or two of economic data to confirm that view. That starts with several key economic updates for December arriving next week, including housing starts and industrial production. It’s easy to rethink the future, but the past still appears one data point at a time.