by Connor Darrell, Head of Investments
Markets managed to climb higher during the abbreviated holiday week, bolstered by the June jobs report, which provided evidence of further strengthening of the U.S. labor market, but not quite enough to suggest the Federal Reserve would need to accelerate its policy tightening. Although the official unemployment rate pushed back up to 4%, the U.S. economy added another 213,000 jobs in June and the increase was due primarily to higher labor force participation (a higher percentage of the population is looking for employment). Wages, which are being watched closely by economists due to their logical connection to inflation, rose 2.7% from a year earlier.
Monetary Policy Update
While they pose challenges over the short term for both stock and bond investors, rising interest rates aren’t all bad. As a result of the Federal Reserve’s policy tightening, the yield on a one-year treasury bill is now roughly even with the core rate of inflation (core inflation removes more volatile energy and food prices from the measurement) for the first time since before the financial crisis. This is good news for savers, as it means that those invested in short-term treasuries are no longer “losing” out in real terms. This will be an interesting area of focus over the next 12-24 months, since inflation expectations are also heating up due to the low rate of unemployment and overall health of the US economy.
As rates rise, the opportunity to earn a higher yield on short-term bonds without increasing credit or interest rate risk will be a welcome change from recent years.