Friday’s bond market has opened sharply higher following the release of a surprisingly weak Employment report. The stock markets are reacting negatively to the news with the Dow down 184 points and the Nasdaq down 49 points. The bond market is currently up 34/32 (1.92%), which should improve this morning’s mortgage rates by approximately .250 of a discount point if comparing to Thursday’s morning pricing.
September’s Employment report was posted at 8:30 AM ET this morning. It revealed an unemployment rate of 5.1%, as expected. However, that was the only reading that came in at forecasts. The report showed that only 142,000 new jobs were added to the economy when analysts were expecting 205,000. Of those new payrolls, only 118,000 were private-sector jobs, falling drastically short of the 200,000 that Wednesday’s ADP report indicated. Furthermore, we saw downward revisions in August’s and July’s numbers that totaled 59,000 jobs. And the average hourly earnings reading that was expected to rise 0.2% actually was unchanged.
This report surprised many people, including myself. Besides September’s payroll miss, the downward revisions to the summer months is also fairly significant because those months traditionally bring upward changes. Therefore, we went from expecting stronger than announced payrolls to now being much lower. The news is directly affecting predictions on when the Fed will raise rates. The downward revisions and last month’s soft number will indeed likely alter the Fed’s plans. I was fairly certain that no change to key short-term rates would come at last month’s FOMC meeting and I was confident they would not make a move at this month’s meeting. As of yesterday, December’s FOMC meeting was the first possible rate hike in my opinion. After seeing today’s report, I now believe that we won’t see a rate change until 2016.
Today’s news has pushed the benchmark 10-year Treasury Note yield below a very important threshold of 2.00%. I was maintaining the cautious approach towards rates with lock recommendations because that level has been so hard to break through and hold. This surprisingly weak report was the catalyst needed to break below. If the Fed indeed does delay raising rates until 2016, it is quite possible we could see the 10-year yield below 2.00% for some time. If they make a move later this year, we can expect yields to move higher and likely above that point. That is the easy part to predict. The difficult question is what will happen between now and the end of the year? If floating an interest rate or considering financing, enjoy this week’s drop in yields and mortgage rates. However, proceed cautiously because I believe we are in for more volatility. That’s not necessarily bad news though since mortgage rates tend to track bond yields and the momentum clearly is lower currently.
Not that it matters much because of the magnitude of the Employment numbers, but this morning’s second report also gave us favorable results. The Commerce Department released August’s Factory Orders data at 10:00 AM ET, announcing a 1.7% decline in new orders at U.S. factories for durable and non-durable goods. This was a larger drop than the 1.0% that was expected, indicating the manufacturing sector was softer than many had thought in August. Since bonds usually thrive in weaker economic conditions, this is good news. Unfortunately, it has not had much of an impact on today’s rates because bonds are already rallying from the day’s first report.
Next week doesn’t appear to have any important economic data set for release. There are a couple of Treasury auctions that can influence mortgage rates and the minutes from last month’s FOMC meeting. There is nothing relevant scheduled for Monday. Look for details on next week’s calendar in Sunday evening’s weekly preview.