Mortgage Rates Were Destroyed Today

Mortgage rates were destroyed today following the rather strong Jobs Report.  The headlines shook the markets – but that was nothing new as I constantly remind employment data is generally a shock of some kind. This time more jobs than expected. When is a job a good job, when is it low paying, and why should we care? It does not seem to matter that markets give much interest in the reality that the jobs being generated are by enlarge jobs no one can live on. Where is the wage growth? The figure suggests underlying slack remains in the labor market, despite an unemployment rate that has fallen from 6.7% a year earlier. Last week Janet Yellen told Congress “The employment situation in the United States has been improving along many dimensions,” However, the labor-force participation rate is lower than expected “and wage growth remains sluggish, suggesting that some cyclical weakness persists.”

Now what will the Fed do? Or more importantly for trading, when will the Fed begin tightening? Everyone likes the report, candy for babies. One guest said this afternoon on CNBC that the lack of increasing wages is normal for this time of the cycle. This time in the cycle, almost six years into it and it is normal for this time in the cycle? Sometimes I wonder where those ideas get any traction. Markets and people like that have been expecting increase in wages for two years now and so far it has not occurred and in my view will not happen to the extent most bullish outlooks anticipate.

The Fed will increase rates - currently the consensus is in June. The longer I do this work, the more confused people appear to be. How much longer the bullish outlook will continue, probably a lot longer than I expect. That is my view and I will stick with it, however I will never let my personal thoughts take precedence over what markets are doing and what we can expect in the weeks and months ahead. We have been warning for a month now that the bond and mortgage markets are bearish.

The support for the 10yr note finally gave way this morning. Breaking above 2.12% now projects to 2.30% our next support level. The stock market worrying now that higher rates are coming - the Fed is currently expected to increase the FF rate at the June meeting. Do not lock that into your mind though, any bad economic reports will rattle the outlook again. The main thing now is to lock on any improvements next week. As you are aware I have been negative toward bonds and MBSs since early February. 

In summary, as the title implies, today's pain was all about the Jobs report, and its associated implications regarding Fed rate hikes.  That is, the strong jobs number raises concerns that the Fed will hike sooner than later.  It is not that Fed rate hikes have anything to do with mortgage rates directly, but in the process of removing accommodation, one of the Fed's steps will be to shrink their balance sheet.  That includes MBS holdings (the "mortgage backed securities" that dictate rates).  So any step in that direction is a step that hurts MBS today, and consequently raises rates.