Mortgage Rates Did Not Move Much With Good Jobs Report

Mortgage rates did not move much today, even though we had a good jobs report today which usually results in increase rates.  While that absence of additional weakness is "nice," the net effect is that rates are at their highest point in the last three months. All - or at least a vast majority - of recent market movement owes itself to general weakness in European bond markets. 

The June employment report had a little for everyone today. More jobs than expected, a plus for the equity markets.  Weaker than expected earnings a minor plus for the bond market at the long end of the curve as inflation is not engaging as many, including the Fed, have been anticipating. Average hourly earnings +0.2% in June, in May just 0.1%. The reaction today did push rates a little higher and MBS prices lower in the early hours of the day, but without the weaker earnings the selling of fixed income would have been a lot more severe. Also on the inflation view, crude oil continues to fall, although there is more to inflation than oil prices; that energy prices are likely to move lower does lessen the concern from that sector. The June employment data does not cause any reason to believe the Fed will re-consider its plans to begin reducing its balance sheet or increasing the FF rate.

Most all recent data that measures inflation have been softer than what the Fed was believing and markets were thinking. It is a positive - strong growth with no inflation but concern must increase that growth will stall eventually if most consumers are not seeing larger pay checks. Consumer spending this year has been anemic compared to what the Fed and most economists and analysts had thought. The Trump initiatives that were widely believed to increase growth to 4.0% have not materialized and not likely to this year and possibly not for at least the next 12 months (and that is optimistic in my opinion). Tax cuts? A workable re-due of health care? Infrastructure spending?

This week we saw the 10yr blast through the 2.30 level to 2.39%, while MBSs still saw negative territory for the week.  Mortgage rates are on the increase, and it has been written for the past two weeks now here in my reports.  The bond market remains bearish technically but fundamentally I do not expect rates will increase quickly. Still holding that the stock market is going to correct itself, but that has not yet happened. When it does, money flows will be back into treasuries with mortgage rates following. I admit I have been tilting at those windmills and my timing has been wrong recently.  That said, still believe it is coming soon – but from what levels as stock indexes continue to improve.

In summary, our bond market continues to be driven by the European taper tantrum.  Until that eases, I do not see our bonds managing any meaningful rally.   I am open to floating over the weekend as I have never been a fan of locking on Friday.  But you should only float if you can afford to be wrong. The trend has not been our friend of late and we had another solid job report today. Certainly, in the longer term we could be setting up for a rally but defense is the name of the game for now in my opinion.  Protect what's in front of you now.