Initial Jobless Claims Drop More than Expected as CD Rates Hold Steady

Initial jobless claims dropped more than expected, another hopeful sign that the labor market is indeed getting better and we might see higher CD rates sooner than expected. Higher CD rates depend on the Federal Open Market Committee increasing their key interest rate, the federal funds rate.

The federal funds rate was driven to record lows by the FOMC when the financial crisis hit and the deepest recession since the Great Depression followed. Average CD rates, savings rates, and money market rates all fell to record lows and remain at record lows. Right now the best CD rates on 1 year certificates of deposit are just above 1.00 percent, average 1 year rates are even less at 0.63 percent.

The FOMC has stated that they plan to keep the fed funds rate near zero percent until the unemployment rate falls below 6.5 percent. The Fed believes this will happen sometime in the late 2015 but I see signs that rates may increase sooner. Initial jobless claims for the week ending May 4th, were 323,000, down 4,000 from the prior week's number.

The better than expected number of 323,000 sent long term bond yields higher as analysts were expecting a number around 340,000. The jobless claims number is the latest in a string of better than expected reports on employment released in 2013. The employment rate which was expected to increased 0.1 percent to 7.7 percent actually fell 0.1 percent to 7.5 percent in April.

The number of jobs created in April, 165,000, was higher than the 135,000 jobs analysts expected. The number of jobs created in the prior two months was also increased. The number of jobs created in February 2013 was increased from +268,000 to +332,000, and March's number was increased to +88,000 to +138,000.

In addition to jobs numbers, there has also been better than expected reports in many other areas of the economy. Consumers are also feeling better about the future as the Conference Board Consumer Confidence number came in at 68.1 percent, higher than the expected number of 63 percent. Pending home sales which were expected to be flat actually increased 1.5 percent as the housing market continues to improve thanks to low mortgage rates and low home prices.

Over the past month there has been a few negative reports released that show an economy that isn't running at full steam. ADP Employment Change for the month of April was expected to show a gain of 150,000 jobs but the number actually came in at 119,000. Factory orders for the month of March declined 4.0 percent, lower than minus 2.5 percent analysts had expected.

The biggest impediment to a robust economy, a lower unemployment rate, and higher interest rates are politics in Washington. Government spending cuts and higher tax rates are taking a bite out of economic growth. The latest battle coming is the debt ceiling we will hit sometime in 2013.

If Democrats and Republicans wait until the very last minute to increase the debt ceiling, investors will become very nervous about holding stocks and commodities. Another round of panic selling in these markets will send stocks, commodity prices, and bond yields lower (when bond prices rise, bond yields move lower). Although the troubles actually will start in the United States, investors will still by U.S. Bonds since that is the only place they feel 100 percent safe in during uncertain times - the classic flight to quality.