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Friday’s bond market has opened up sharply following the release of this morning’s major economic data. The stock markets are reacting negatively to the data, pushing the Dow down 93 points and the Nasdaq down 19 points. The bond market is currently up 27/32, which should improve this morning’s mortgage rates by approximately .250 – .375 of a discount point if comparing to yesterday’s morning pricing. Limiting this morning’s improvement is weakness during afternoon trading Thursday that caused some lenders to revise pricing higher.
The Labor Department gave us today’s only relevant economic data with the release of August’s employment numbers. They announced early this morning that 169,000 new jobs were added to the economy last month, falling a little short of the 177,000 that was expected. However, significant downward revisions to July and June totals are magnifying the miss in the August payroll number. July’s number of new payrolls was revised from 162,000 down to 104,000, meaning the economy added one-third fewer jobs than previously thought. Add the downward revision of 16,000 jobs to June’s number and we have lost 74,000 jobs on paper this summer that were being used to support the theory that the Fed will start tapering their bond buying program later this month.
And the payroll numbers aren’t the only headline readings that surprised this morning. The report also showed that the unemployment rate slipped to 7.3% last month when analysts were expecting it to remain at 7.4%. That would appear to be bad news for the bond market and mortgage rates because it is the lowest level since December 2008, but within that data is the true cause of the decline. It appears that the drop in unemployment is due to the lowest labor participation rate in 35 years. That means that the pool of people actually working or actively looking for employment is at its smallest since August 1978. In other words, the unemployment rate did not drop because more people are working. It moved because more people have given up looking for a job. This piece of information takes the negative of a decline in unemployment and makes it a positive for bonds and mortgage rates.
This morning’s bond rally has erased most of yesterday’s losses, pushing the 10-year Treasury Note yield down to 2.89%. However, I don’t believe that today’s news is enough to prevent the Fed from making a move at their FOMC meeting September 17-18. I stated earlier this summer that the Fed will probably make a token reduction to their bond purchases to more or less break the ice. It would end all the speculation and ridiculous volatility that has surrounded this issue but would not have a significant impact on the Fed’s goal of keeping long-term interest rates low to help fuel economic growth. I think that today’s news supports that theory as the data clearly shows the employment sector is growing but not at a rapid pace. Once the Fed takes the first step towards winding down QE3, future moves should be much less of a spectacle, limiting the wild swings in the markets and interest rates that we have seen over the past couple months. My guess is still th! at they will ease their monthly purchases by $5 billion or $10 billion as the initial move. That would be enough to calm the markets and put the first step behind them while being able to maintain $75 billion or $80 billion in monthly purchases for an extended period if the employment sector does not grow at a quicker pace over the last months of the year.
Today’s move is good news for mortgage shoppers and allows them to recover the rate increases from yesterday and Wednesday afternoon. Unfortunately, this may be short-lived until we get past the FOMC meeting.
Next week brings us another round of relevant economic data including an important measurement of consumer spending and a key inflation reading, in addition to a couple of Treasury auctions that may influence mortgage rates. There is nothing of relevance scheduled for the first part of the week in terms of economic news, but that is also when Congress will be back in session so the Syria issue will be in the spotlight again.