Commercial real estate investors are welcoming the news that the 10-year Treasury rate has fallen by 15 basis points to the 4.2% range since the beginning of August. However, underlying forces pushing the rate lower are important to analyze, warned John Chang, chief intelligence and analytics officer at Marcus & Millichap.
Employment figures have been drastically revised downward from previously reported levels, with May job creation plummeting to 19,000 from the original estimate of 144,000 jobs, while June’s initial forecast was changed from 147,000 to 14,000. Altogether, 258,000 jobs were erased from the previous tally, he said.
“Instead of being up by 855,000 jobs so far this year, we've only added 597,000 new jobs, and while the unemployment rate is still very low at 4.2%, we have to bear in mind that the labor force participation rate has fallen significantly since April,” said Chang.
While lower labor force participation has kept the unemployment rate down, it also may be signaling a weakening employment market, he said. The upshot for investors is that the jobs report has triggered a shift of capital into the safety of the bond market, pushing interest rates lower, according to Chang.
Meanwhile, the likelihood of a Federal Reserve rate cut of at least 25 basis points in September is at 95%. Wall Street prognosticators appear to think even more cuts will follow, with the market currently baking in a greater than 50% likelihood that the overnight rate will be lowered by 75 bps to 3.5% by the end of the year, said Chang.
However, the Fed overnight and the 10-year Treasury rate do not always move together, and Chang cautioned that a Fed rate cut is not a foregone conclusion. The potential inflationary impact of tariffs remains, and if significant signs of rising inflation show up in the true inflation reports that come out before the next Fed meeting, it's possible the central bank won't decide to cut rates.
“The Federal Reserve has a dual mandate,” said Chang. “They need to keep inflation down and they need to support job creation. Potentially, those two missions may be in conflict by September, and if the Fed sticks to its historical playbook, they'll keep rates higher to fight off inflation rather than drop rates to support job creation.”
The slackening pace of job creation, along with other weakening indicators, suggests the economy is slowing and potentially heading toward a recession.
“A slowing economic climate could weigh on household formation, reducing the pace of apartment absorption from its current record high level,” noted Chang.
“We could also see slowing consumption that could weigh on retail and industrial space demand. And finally, office demand could potentially be bolstered by the tightening labor market as companies enforce more aggressive return to office mandates.”
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