Stellar June Jobs Report Won't Have Much Effect on Rates

Last week's impressive June jobs number boosted spirits and stocks on Wall Street. But it won't lift interest rates much as political uncertainty remains.
By Gregg Greenberg ,

Last week's Street-beating June jobs number boosted spirits and stocks on Wall Street. Nevertheless, it won't lift interest rates much as political uncertainty remains, said Joseph Seydl, capital markets economist at J.P. Morgan (JPM) - Get Report Private Bank.

"The June employment report is not enough to get the Federal Reserve to move in the fall considering all the political uncertainty stemming from globalization," said Seydl.

"Right now December is the best bet for any rate hike."

Seydl expects the yield on the 10-year Treasury bond, now at 1.4%, to finish the year a little higher at around 1.5%. But he believes the benchmark bond's yield will drift toward 1% in the next year or two because of the lack of risk-free assets available for purchase in the global market. "There is simply a shortage of sovereign bonds to buy out there," said Seydl.

Seydl said risk-free yields were falling across the developed markets even before the Brexit vote. In his view, globalization created enormous sums of wealth through the 1990s and 2000s, but the U.S. Treasury did not create comparable sums of new securities. Nor, in his opinion, did the Chinese government create a bond that would serve as added supply to the risk-free market.

"China is only minimally making steps toward supplying one," said Seydl, adding that his structural view also benefits gold, high-yielding municipal bonds and select emerging market debt.

In terms of stocks, Seydl said he prefers U.S. equities over European ones because of America's growth prospects. Still, Seydl said he is a fan of high dividend European stocks because of the global search for yield, plus they have "cyclical upside" due to the European Central Bank's easy monetary policy.

Finally, Seydl does not think the United Kingdom's exit from the European Union will drag the rest of Europe - or the U.S. - into a recession.

"They are too small a player at 2% of global GDP, so there is no worry there," said Seydl.

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