Friday’s job report was a mixed bag of confusion and frustration.
Mortgage rates saw significant improvement last week with weaker economic data providing a sigh of relief for bond traders.
Trading slowed down towards the end of the week and continued sideways into Monday this week as investors appear to be holding their collective breath for tomorrow’s CPI report to drop.
Friday’s job report was a mixed bag of confusion and frustration.
The headline number came in well above expectations (275k new jobs added vs 198k expected) BUT in the same breath, unemployment unexpectedly rose from 3.7% to 3.9%?!?!
WTF 😵
The reason for this is simple but frustrating. The BLS (the entity that puts these jobs reports together) revised the previous 2 months of data down by a massive 167,000 jobs.
The net impact is thus effectively 108k new jobs (275k headline number minus 167k jobs removed from previous months) added vs the 198k expected.
These massive revisions after the fact naturally add some speculation to the accuracy of the headline numbers when they are published.
This frustration brings with it an extra sense of anxiety heading into this week’s CPI report and next week’s Fed meeting as traders just want to know what direction we’re heading…
It feels like today could be a doozy (AKA high drama for bonds)…for better or worse.
How’s Brian feeling about mortgage rates?
Not as optimistic anymore… 🧐 (no changes from last week)
- 3-month outlook (May 2024) – The Fed narrative pivot has added fuel to the economy. The stock market is evidence of that. The new inflation numbers are as well. The 7% range (give or take) will likely be our home for a while.
- 6-month outlook (August 2024) – I still expect the job market to show some cracks in Q1/Q2 – we’re seeing an increase in layoffs being announced. People experience layoffs are having a harder time finding new jobs, as evidenced by the rising continuing jobless claims numbers. We saw retail sales and consumer spending fall a little already – I expect that trend will continue, BUT if the job market remains strong that could be a pipe dream. Housing costs (the biggest contributor to inflation right now) will stay flat or fall with more apartment units coming online which will help inflation concerns and rates can come back down to the mid to high 6% range.
- ***12-month outlook (February 2024) – Barring any major distress in the banking world (very possible with the commercial lending situation), it’s now hard to see a path below 6% in the next 12 months. The mid-6% range seems most likely at the moment.
***The wildcard is the US government. If they don’t do some massive budget cuts to get spending under control soon I could see the demand for US Treasury debt falling off a cliff and that could drive all rates higher. Or maybe the 30-year fixed mortgage will be seen as a safer bet and the yield between the two will no longer correlate as it has in the past? 🤷♂️
Other Relevant Macro News
- Weekly mortgage demand surges 11% as more homes hit the spring market
- Powell says the Fed is ‘not far’ from the point of cutting interest rates
The Week Ahead
- This is a BIG week. The Fed meets next week so the data this week will heavily influence how that meeting goes. February CPI (consumer inflation) comes out this morning (about the same time this email is sent) and the stakes are high. January CPI surprised us with hotter inflation than expected, and rates moved way higher as a result. Was that a fluke or a new trend? This CPI will help provide insight into that question. We also get a peak at PPI (producer inflation) and retail sales data this week, both of which have the potential to be big market movers.
