Blow Out Employment Numbers Fail to Blow Up Lending Rates

We've been emphasizing monthly employment numbers for at least the past two years, and for good reason: The employment situation is a key variable in the Federal Reserve's interest-rate calculus. Strong job growth enables the Fed to raise interest rates, which it did last month by raising its range on the federal funds rate.

Job growth remains strong to this day. Payrolls soared 292,000 in December. The number smoked most economists' estimates by a wide margin. What's more, October and November payrolls were adjusted up a total of 50,000. October payrolls were adjusted up to 307,000. eral funds rate.

With payrolls trending ever higher, interest rates should be expected to trend higher as well. Rising payrolls reflect robust business activity and a strong economy.

But the world is never so neat and tidy. Since last Friday, when December's employment numbers were released, interest rates have actually drifted lower. The 10-year U.S. Treasury note yields roughly 10 fewer basis points today than it did last week. Long-term mortgage rates, namely the rates on the 15- and 30-year fixed-rate offerings, are being quoted near a two-month low.

Macro events have taken center stage: China's stock market has tanked to start 2016. Our own stock market isn't fairing much better. The S&P 500 is down 6% year to date.

Deflation, more than anything, has financial markets on edge. Oil recently hit an 11-year low, with West Texas crude trading near $30/barrel. Commodities in general – oil, natural gas, metals, grains – are all selling near multi-year lows. On the other hand, the U.S. dollar remains at multi-year highs against many of the world's currencies (which reflects strong world demand for U.S. assets and investments, including U.S. real estate).

When these events are aggregated, it appears unlikely the Fed will implement another rate hike in the near future. Traders in fed funds rate future contracts are pricing only an 8% chance of another rate increase when Fed officials meet later this month. They're pricing a 43% chance when Fed officials meet in mid-March.

We're skeptical that we'll see another rate increase until the second quarter of 2016. But even if we do see the Fed ratchet the fed funds rate higher that doesn't mean all mortgage rates will ratchet higher.  We've seen some up-drift in short-term mortgage rates since December. Long-term mortgage rates have remained muted.

Inflation is key. If there is no inflation, expect long-term mortgage rates to remain low.  There is such a dearth of inflation these days that we've heard forecasts of the yield on the 10-year Treasury note falling below 2%. If that occurs, you can be sure that quotes below 4% on the 30-year fixed-rate loan will again be the norm.   

 Information provided by Jessica Regan.

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