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.
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