Sometimes Average Is Good Enough

The employment data for September were released last Friday. The numbers were of the shoulder-shrug variety.

Payrolls increased by 156,000 for the month, considerably lower than the 200,000-or-more monthly gains that we had seen earlier in the year. As for the unemployment rate, it actually increased, drifting up to 5% from 4.9%. Few economists were alarmed, though. The unemployment rate rose because more discouraged workers sought employment. (Discouraged workers aren’t counted in the official unemployment tally.)

The September employment numbers should have been much ado about nothing, except they weren’t. The numbers were just good enough to convince financial markets that it’s “game on” –  an interest-rate increase is on the way.

The yield on the 10-year U.S. Treasury note rose to 1.8%, the highest it has been since mid-June. The 10-year note, in turn, leads long-term mortgage rates. The 30-year fixed-rate loan continues to move higher. Depending on the day, a quote of 3.5% on the 30-year loan can still be found. But more often, 3.625% is likely for a top-tier conventional loan.

Election Day is Nov. 8; Federal Reserve officials meet again on Nov. 2. We’d be shocked if the Nov. 2 meeting produced an interest-rate increase. Most people concur with us. Traders in federal funds rate futures contracts are betting only an 11% chance of a rate increase at the next meeting. As for December, that’s a different story. These same traders are betting a 70% chance a rate increase will occur then.

With more market participants anticipating a rate increase, it’s only natural that rates would rise ahead of the blessed event. Markets are forward-looking entities. Changes in the perception of what the future holds moves market prices, including interest rates.

Of course, we’ve been down this road before. Last year around this time, mortgage rates began to drift higher as the market priced in a rate increase for December. But once the rate increase was announced, mortgage rates plateaued and then drifted lower through the first half of 2016. Those lows held until a few weeks ago.

As Mark Twain observed, history doesn’t repeat, but it frequently rhymes. Should the Fed raise the federal funds rate in December, the increase will likely be no more than 25 basis points – the same increase as last year. (As a percentage, this next increase will actually be less than last year’s increase. The Fed doubled the fed funds rate last year; this next increase, it will increase it by half.)

Given sluggish global economic growth, 25 basis points might be all we see until December 2017. And if history really does rhyme, we could see mortgage rates drift lower again. That means a 3.25% quote on a conventional 30-year loan could again be in the cards for mid-2017.

Information provided by Jessica Regan.

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