The Great Reprieve Appears 

In recent weeks, we've mentioned more than once that the employment report for August could sway the Federal Reserve's decision to raise or hold interest rates. The report is in, and the numbers were less than what was bargained for.  

August saw only 173,000 new jobs created. The key number has always been 200,000+ new jobs. Nevertheless, the latest job gains (plus revised gains for the prior two months) pushed the unemployment rate down to 5.1%, but there is a catch. The employment participation rate remains at a multi-decade low, at 62.6%.

Part of the lower participation rate is attributable to changing demographics – an older population and more younger people staying in school longer. Still, participation remains stubbornly low.  Too many people are not working. The good news is that wages and average weekly hours worked continue to creep higher.

The latest employment report could lead to a fiery debate when Fed officials convene on Sept. 16 and 17. The stock market should add fuel to the fire. The Dow 30 and the S&P 500 were down over 10% in the last week of August. A drop of 10% or more is considered a stock-market correction.

The Fed is supposed to act independently of stock prices, but stock prices do influence the Fed. Stock prices certainly influence traders in federal fund rate futures contracts. These traders bet on the odds of a Fed interest-rate increase. They're not giving very good odds these days. CME Group, which offers a “Fed Watch” service, says traders are pricing futures contracts with a 19% chance of a rate increase. This is down from 32% in the prior week. The decrease in traders odds correlates with the decrease in stock prices. 

Of course, stocks could rally and odds could change. Both frequently do. Still, we remain sided with the traders betting the low odds. We don't think the Fed will raise the federal funds rate come next Thursday: The U.S. job numbers were weak for August, the U.S. stock market is in a funk, inflation remains muted, and global economic growth (most notably China) is waning.  Also, the U.S. dollar remains historically strong against most world currencies. An interest-rate hike would further strengthen the dollar.  (This is a mixed blessing: Imports are cheaper, but exports cost more.)

Mortgage rates seem to side with us. Rates have drifted lower since Friday's employment report. A quote below 3.9% on the 30-year fixed-rate loan is the norm in many markets.  The 15-year fixed-rate loan is regularly quoted below 3.1%. 

This doesn't mean we are home free. Market participants move interest rates independently of the Fed. Mortgage rates can rise even if the Fed does nothing onSept. 17. 

Yes, we see mortgage rates holding current lows, but that can change in a hurry. Though we don't think it will, “a hurry” could come as soon as next week. 

Information provided by Jessica Regan.

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