Published Date 2/2/2024
Interest rates have a long and reliable history of reacting to
the jobs report more than any other monthly economic data and the most recent
example sent mortgage rates screaming higher at the fastest pace in over a
year.
Labor market strength = higher rates, all other things being
equal, and Friday's NFP or "nonfarm payrolls" (the main component of
the report), came in significantly
higher than expected (353k vs 180k forecast). December's payroll count
was also revised much higher (333k versus 216k previously).
When NFP deviates from expectations by such a wide margin, it's
unfortunately common to see a lot of commentary suggesting some sort of
manipulation or at least incompetence, but that's not something that smart,
credible market participants tend to entertain. Reason being: they
understand that January's jobs data (the stuff released in early Feb) is often
plagued by major departures from expectations because it's the one month of the
year where the Bureau of Labor Statistics (BLS) implements new benchmarks based
on a comprehensive count of jobs conducted in March of the previous
year.
The BLS benchmark revision process is mind-numbingly arcane for
most people who don't have a background in statistics. Unfortunately, the
esoteric nature of the problem leaves lots of room for people without a
background in statistics to come up with conspiracy theories.
To understand this better, consider the changing composition of
jobs over time. BLS adjusts job counts based on weightings that are
determined once per year based on a more thorough count of labor market
information in March. If the composition of the labor market is changing more
rapidly than normal (which is an understatement for the post-covid economy), it
can result in big deviations from expectations when the revisions are
implemented in the January data.
If you'd like to see the actual changes in each industry
category, BLS publishes the data here: https://www.bls.gov/web/empsit/cesprelbmk.htm
Benchmark revisions, alone, don't explain the wild results this
week, but they help the financial market take the numbers with a grain of
salt.
There are, of course, other ways to look at the labor market
without having to worry about all that confusing stuff. For instance, we
could simply ask people if they're unemployed. BLS does that and, indeed,
those numbers were far less shocking (unemployment rate of 3.7%, unchanged from
last month, but slightly stronger than expected).
Even after the "yeah buts," the jobs report was still
deemed much stronger than expected, and that's the sort of thing that pushes
mortgage rates higher.
The bond market (which determines rates) was also stretching
into levels that were arguably a lot lower than expected due to events of the
previous 4 days this week. That made Friday's whiplash all the more
brutal. Without the big drop earlier in the week, bond yields would look
like they were leveling off more gently from recent highs.
Consider this, both of the past 2 days saw the biggest drop in
mortgage rates in more than a month. The two days before that were also
slightly stronger. Mortgage rates on Friday are roughly in line with last
week's highest rates. Only by comparing Thursday's surprisingly low
rates to Friday's abrupt bounce can we observe the biggest single day
jump since October 2022.
Believe it or not, there are even more confusing reasons behind
this week's volatility that have to do with the structure of the
mortgage-backed securities market, but we'll save that for a dedicated
"deep dive" in the future. The bottom line is that it took
something of a perfect storm to cause this big of a jump in rates.
Rather than focus on attempting to understand why things
happened in the recent past, perhaps it's better to consider what it means for
the near-term future. The good news is that a strong labor market alone
is not capable of keeping rates at higher levels if inflation continues to come
down.
In this week's policy announcement press conference, Fed Chair
Powell said the Fed is confident that inflation is doing what it needs to in
order for the Fed to cut rates this year, but that they'd like to be just a bit
more confident. Strong labor market data increases doubts, all other
things being equal, but if upcoming inflation reports show more evidence of
core inflation moving back to the 2% target, financial markets will move into
position for lower rates even before the Fed officially cuts.
The next major
inflation report is 2 weeks away which leaves investors to focus on other
economic data next week in addition to comments from Fed speakers and the
Treasury auction cycle.
All information furnished has been forwarded to you and is provided by thetbwsgroup only for informational purposes. Forecasting shall be considered as events which may be expected but not guaranteed. Neither the forwarding party and/or company nor thetbwsgroup assume any responsibility to any person who relies on information or forecasting contained in this report and disclaims all liability in respect to decisions or actions, or lack thereof based on any or all of the contents of this report.
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NMLS: 181064
Cell: 512-733-6207
8/14/2024
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