Mortgage Rates Steady - Jobs Report Tomorrow

Mortgage rates held steady today, as we now have seen small or moderate improvements each day in the last two weeks – ultimately bringing rates back within striking distance of 2016's lows.  Only a few days in early February have been better and from there it is only a short distance to all-time lows from 2012.  

Employment data each month cannot be over-emphasized, and that is what we have tomorrow – as it is the elephant of all data.  This one tomorrow is the most important we have seen this year; it is April data, its Q2 data. Q1 was weak, up 0.5% and has not garnered much concern as Q1 over the last few years has a pattern of softness in the economy. Investors and markets while not totally ignoring it, it fits the pattern and in itself has little baring on the Fed’s thinking but Q2 data is critical for the Fed and markets overall. So far April data, particularly the two IMS reports (manufacturing and services) have been good. 

However, yesterday ADP reported less jobs created than was expected, and this morning weekly claims increased 17K (although the report is not included in the April report), more than forecast.  The April Challenger job cut report increased to 65K from 48K cuts in March. So far these are more anecdotal than serious but tomorrow’s employment report, if weaker than markets and traders are expecting, will increase the importance of Challenger and weekly claims. Not many are worried about jobs, in fact most all economists, pundits, analysts and traders believe the low unemployment rate is so strong that it will propel growth, higher stock market, higher interest rates, and a big increase in GDP growth in Q2. Only a handful warn that jobs being created are subsistence wages. I cannot count how many guests on the financial news networks, the Wall Street Journal and other print media simply push the quality of jobs completely out of the discussion.

The Federal Reserve is itching to increase rates, and has been for a year, it made one move in December then told the world there would be four increases this year.  The Fed and other central banks are boxed in, our Fed is scared to death that if it moves it will tip over the over-valued equity markets that would make the Jan/Feb selling look like kids play. The Fed and its rulers are stuck unless the data proves what it says that inflation will increase and the economic growth will continue to grow with higher rates, even though historically the growth will still be minimal. If there is one thing that is clear, our Fed and other major central banks are on ground that has never been tested.

Tomorrow’s employment data is key to the near term market movements, more so than we have seen this year or last. The bond and stock markets are both at key technical levels. Is the bond market sending a signal that rates are going to decline tomorrow and MBS prices increase?  It is unusual that the 10yr note and MBS prices have had such a good day today, as the 10yr dropped to 1.74% and MBSs had a gain of 31BBPS.  I has a suspicion this might happen, but not this drastic. The move today, notwithstanding tomorrow’s data, has turned the work completely bullish after being flat until today. If it continues tomorrow the 10yr has a clear path to 1.70% then to test 1.60% and mortgage rates will drop in yield. It is a big day for rates tomorrow. If on the other hand employment is seen as positive we will see the other side of the coin. 

In summary, I rarely float into the Friday report as I have been too skittish the past two years.  With the impressive run we've seen so far in addition to the outright levels being close to the years lowest, there's limited incentive to delay locking.  To be sure, rates can definitely continue to move lower, but past precedent suggests the current scenario is typically a better locking opportunity.  Bond yields are searching for reasons to go lower.  I cannot say it enough, the trend is your friend.  I am riding this rally into tomorrow's employment data, momentum is certainly in our favor.