Did the Employment Numbers Seal the Deal?

Everyone's talking interest-rate hike after the blowout employment numbers for October. Payrolls surged by 271,000, handily beating all economists' estimates. October saw the strongest monthly payroll gains since last December. The surge in employment, in turn, dropped the unemployment rate down to 5%, the lowest it has been since May 2008. 

Job gains were realized across a wide swathe of the economy. Professional and business services lead the way with a 78,000 gain. The sub-component of temporary help services – a leading indicator for future hiring – was up a robust 25,000. What's more, everyone now working has, on average, a little more money to spend. Wage growth for October increased 2.5% year over year. 

When employment takes flight, interest rates are sure to follow. Indeed, the yield on the 10-year U.S. Treasury note spiked nearly 10 basis points when the employment numbers hit the wire last Friday. As the 10-year note goes, so too goes mortgage rates. Rates rose to a four-month high over the past week. For much of October, the 30-year fixed-rate mortgage was quoted below 4%. Today, it's regularly quoted above 4%. 

Lenders are obviously pricing in a rate increase at the next Federal Reserve meeting, to be held on Dec. 16. More traders are also pricing in an increase. Federal funds rate futures contracts are priced with a 68% probability that the Fed will raise the fed funds rate next month.

So, it appears our streak could be ending. We've been saying since the beginning of the year that we don't see a fed funds rate increase until 2016. As recently as last week, we affirmed that opinion. But as a famous quote attributed to economist John Maynard Keynes goes, “When the facts change, I change my mind. What do you do?” We change our mind. We'll concede that a rate increase is more likely than not come December. 

That said, more likely isn't synonymous with inevitable. If consumer price inflation remains muted and if gross domestic product growth is revised downward, we could easily see the probability of a rate increase fall. The deal isn't done yet. 

Until then, we expect to see 4%-plus quotes on the 30-year loan. If the Fed decides again to kick the can down the road and postpone a fed funds rate increase, rates will very likely reverse course.

And if the Fed does raise the fed funds rate, that doesn't mean rates are going higher still.  When the Fed made its other major policy change – to systematically withdraw from quantitative easing two years ago – rates ran up until the time the Fed begin to withdraw. Rates than drifted lower by a full percentage point over the subsequent year.

Information provided by Jessica Regan.

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