Mortgage Rates Jump Following ADP Report

Mortgage rates have shifted upward thus far today after holding for the past several trade sessions.  Last night I mentioned that even though there was only a slight move upward, I feared that we had crossed the resistant level of 2.50% with the 10yr Treasury note.  At 11:00AM, we have the 10yr at 2.56% and MBSs, after dropping nearly 40BPS, is off by 26BPS. 

What happened?  The February ADP Private Payroll Report blew the doors off market expectations, coming in over 100K (298K). Plus, January was revised upward from 246K to 261K. This sent MBS lower and the 10yr yield up.  Non-Farm Productivity in the 4th QTR matched the same pace as the 3rd QTR with a 1.3% gain but that was below forecasts of 1.5%. The culprit was rising Unit Labor Costs which were higher than expected.

The January Wholesale Inventories Reading showed a pullback of -0.2% which was a bigger draw down than the expectations, which with this generally shows stronger demand.

Today, we get our 10yr Treasury Auction which is not as important as tomorrow's 30yr bond auction. Yesterday's 3yr note was one of the weakest that we have seen since 2008.

Across the pond, we saw some good reports from China (number 2 economy) as they saw their import data jump higher than anticipated and showed their growth is coming from internal demand. Japan (number 3 economy) saw their Leading Economic Indicators picked up in January versus the previous month.  And Germany (number 4 economy) saw their Industrial Production in January beating estimates. 

The French election is next month, the first of two if there is not a mandate. Currently this is not directly impacting markets but if LePen were to win (based on polls now not likely) the EU will be stretched to redefine its charter. The polls prior to the UK Brexit did not show a vote to exit, the polls here on last year’s election also were pointing to a Clinton win. Markets got the US election wrong and got the UK vote wrong.

The big beat in the jobs numbers is pushing mortgage rates higher.  The market did not expect this kind of strength in hiring.  When something like this happens, volatility will increase while the markets digest the data. Also, the data this morning adds to the reality that the Fed is falling behind in increasing interest rates at a more rapid pace.

The Fed now must move three times this year to keep up with the economic growth that will inevitably lead to increased inflation. The Fed can be criticized for its slow movement as the Fed has been managing the economy for five years.  There is a difference in opinion if they should have or did what they have done, but now it is going to happen. Surely it is not a plus for mortgage rates on the surface but I expect as rates increase home sales will hold well and likely increase as the Lassa fare attitude consumers have had with no incentives to sell or buy. Trading in the FF futures markets has increased to a 98% probability of an increase next Wednesday. The BLS employment report on Friday, must be shockingly weak to delay the Fed – and unfortunately for those who have been hoping for lower rates, I do not think that will happen.