Is It Time to Change Our Tune?

The number was certainly big, which is to belabor the obvious.

July payrolls came in much higher than expected, with 255,000 new jobs being added for the month.  What’s more, June payrolls were revised up by an additional 5,000 to 292,000. May payrolls were also revised higher.  Two consecutive months, two consecutive blowout numbers.

The unemployment rate was nudged lower to 4.8% from 4.9%. You would normally expect to see a larger drop in the unemployment rate. But with job prospects improving, more people are being drawn back into the workforce. The employment participation rate moved up to 62.8%.

For the past two weeks, we’ve mentioned that there are few anticipated events that could move interest rates: Federal Reserve officials won’t meet again until next month. The UK Brexit vote is at best a back-burner issue now, if not a forgotten one.  We surmised that only the employment data could get rates moving – one way or the other.  Strong employment numbers could move interest rates higher.

So, did July’s employment numbers get interest rates moving higher?

After the employment numbers were released last Friday, rates moved higher.  We saw an immediate spike in the yield on the 10-year US Treasury note. The yield was up nearly 10 basis points to above 1.6%.  We also saw a spike in rates quoted on many mortgage products.

Since then, Treasury yields and mortgage rates have drifted lower. Indeed, the yield on the 10-year Treasury note is about where it was before the July employment numbers were released.  Mortgage rates are again quoted in the range that prevailed before last Friday. It appears nothing has changed.

It certainly hasn’t changed with traders. Federal funds rate futures contracts are priced with a 12% chance the fed funds rate will be raised next month. Meaningful odds don’t arise until December, where the odds are 43%.

Few credit-market watchers think the Fed will move the fed funds rate higher before December.  You can count us among them.  Yes, employment has picked up in recent months, but gross domestic product (GDP) growth remains sluggish, posting at 1.2% on an annualized basis for the second quarter.  We also need to keep in mind that that US dollar remains exceptionally strong when measured against other currencies, particularly against the British pound and the euro.  A rate increase would likely strengthen the dollar even more.

Therefore, we have to answer, no, it’s not time to change our tune.  We can see the current range of mortgage rates holding through the rest of the month.  That said, come September 2, we get the employment report for August.  Another blowout number on the upside will certainly move rates higher. Whether they stay higher, is another story.

Information provided by Jessica Regan.

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