U.S. stock markets have had a strong start to 2013, with both the Dow Jones Industrial Average and S&P 500 gaining more than 15% in the first five months of the year. Consumers have shrugged off higher payroll taxes and confidence has risen to a six0year high while budget cuts have led to a falling federal deficit and even surpluses in state and local governments. This have given investors enough confidence to bet that the second half of 2013 will be driven by GDP growth and falling unemployment.
Add it all up, and despite a bad hour of trading on Friday, the markets are having a great year.
What will continue to fuel this run are a falling unemployment rate, continued low interest rates, and low energy costs.
On Friday, the Department of Labor releases nonfarm payrolls for May and the unemployment rate. Economists expect a slight increase in hiring to 170,000 workers for the month and a steady unemployment rate of 7.5%.
Within those numbers we should watch for trends in government hiring and whether or not people are entering or leaving the workforce. Over the past two years, cuts at state, local, and federal governments have been a huge drag on employment, but with budgets improving, the negative trends should begin to subside. The labor force participation rate is also important, so look for any uptick in people entering the workforce. That would indicate that people feel more positive about job their prospects than they were last year.
We’ve enjoyed historically low interest rates since the financial crisis, a trend that needs to end someday. Last week, comments from the Federal Reserve indicated that the central bank may see an end to its bond-buying program, and mortgage rates shot up as a result.
Since housing has helped fuel the recovery in the past two years, mortgage rates are a key input into the economy. If rates rise too far, too fast, it could stall homebuying and homebuilding, putting a drag on the economy. I don’t think Ben Bernanke and his friends at the Fed will let that happen, but the big jump last week is worth keeping an eye on this month.
Ironically, these rising rates are actually good for big banks, and both Bank of America Corp (NYSE:BAC) and JPMorgan Chase & Co. (NYSE:JPM) were beneficiaries of higher rates last week. That’s because they can borrow money short-term at near 0% interest and lend it out in the form of mortgages or business loans at higher rates. If long-term rates go up and short-term rates stay low, it’s great for bank profits.