Why Does the Non-Farm Payroll (NFP) Report Affect Mortgage Rates?

On Friday, the Non-Farm Payroll report came in much weaker than expected (134k new jobs vs the estimates of 185k), and helped stabilize mortgage rates once again.  Have you ever wondered why a single report could have such a huge effect?

The non-farm payroll figure (a.k.a. NFP) represents the number of jobs added or lost in the economy over the last month, not including jobs relating to the farming industry. The farming industry is not included because its seasonal hiring distorts employment numbers around harvest time. Non-farm payroll is an important day trading indicator because it affects all markets; the job market impacts the FX, bonds, stocks, and derivatives markets.

 

From a basic economic sense, when the NFP shows an increase in jobs it means the economy is doing well. An increase in employment means that companies are growing, and a secondary benefit is that the newly hired workers will have more money to spend on goods and services. A decrease means that the opposite is true. NFP and the overall job market have become key indicators for traders and that is reflected in the market’s sensitivity to the non-farm payroll report. The report includes the unemployment rate, what sectors have increased or decreased their workforce, what the average hourly earnings are, and any revisions that need to be made to prior reports.

 

So why does it help mortgage rates?  To put it very simply, a poor report highlights the lack of economic growth.  Lack of economic growth is good for bonds, including MBS (mortgage-backed securities), the key driver to mortgage rates.  So when a report comes in showing weakness, like Friday's did, traders are more likely to buy bonds including MBS which helps mortgage rates.

 

The question now is how long will the effect last?  Likely not long.  There is no economic data today but we do have a very interesting week. The biggest events will be Janet Yellen's first testimony as the Fed Chair and the 10 year Treasury note auction. As far as economic data, the biggest report of the week will be the Retail Sales report on Thursday.

WHAT TO WATCH FOR

It's Yellen Time: She will testify before Congress for the first time as the Fed Chair. No doubt the focus will be on the weaker than expected labor results and what the Fed may do going forward if that trend continues. The 10 year Treasuries yields are dropping this morning as traders are speculating that Janet Yellen will acknowledge that the Fed may have to suspend or alter further tapering plans.

Just a FYI and a bit of an advance warning - Debt Ceiling: What?  We maxed out our credit card again?  We will once again hit our debt ceiling on February 27th and any new legislation to raise it (or not) could impact the bond market.

If there are any questions you may have to financing, please give me a call at 314-744-7806, or visit me on my website at www.CallTheMoneyMan.com.