Feb 3, 2023
We are carefully floating and will switch to locking if it breaks beneath the floor.
3 THINGS TO KNOW
That Feeling When Your 180% Wrong…
The unrelenting strength of the US labor market flexed hard today, with the Bureau of Labor Statistics (BLS) reporting there were 517,000 new jobs created in the month of January. Yes, you heard that right. This number is 2.8 times the 185,000 pace the market was anticipating.
To understand the significance of this report, you have to consider that higher interest rates generally work as a tool to weaken the labor market. Given that the Fed Funds rate has moved up 4.5% since March, the labor market is defying all traditional economic beliefs that have been in place for many decades. At this point, the Fed may choose to push rates higher and hold them longer. Ugh….
Unemployment Fell as Well
In a second surprise, the Unemployment Rate fell from 3.5% down to 3.4%. Given that most economists were expecting to see this rate rise up to 3.6%, this is another major shock to the markets. The only real good news the Fed will find in this report is that the labor market grew by more than 800,000 workers. This is very good news, as labor shortages have been a significant driver of inflation, as companies were able to raise prices to slow the pace of sales to a level they were able to support. When businesses do not have the staff to meet consumer demand, prices are pushed higher.
The concern now will be how the Fed will respond to this morning’s report. The fear is that members will revert back to making intentional statements to the public to add more fear to investors who have been overly optimistic about the prospects of the Fed having to reverse course and start to cut rates midway through 2023.
The optimistic pool of investors has pushed stocks higher in recent weeks and driven bond yields down. Although this has been good for mortgage interest rates, it has not been helpful for the Fed’s attempts to slow the labor market.
As we warned in yesterday’s update, the rates we had were likely as good as we will see them for a while. Mortgage bonds have fallen hard in early morning trading and are now at risk of breaking beneath the floor that has prevented rates from moving higher the past three weeks. However, this floor has been a strong support level for us so we are carefully floating and will switch to locking if it breaks beneath it.
Feb 2, 2023
Given the risks associated with the battle over the 200-day moving average, we will switch to a locking bias.
3 THINGS TO KNOW
We got the 1/4% rate hike we expected
Following the announcement, Fed President Jerome Powell acknowledged that inflationary pressures have eased. However, more tightening is needed to ensure that levels return to the Fed’s target rate of 2%.
Two more ¼% rate hikes are anticipated before the Fed ends this rate hiking cycle. The Fed has a terrible history of going too far in both directions when adjusting interest rates. It is very likely that the Fed will either push rates too high or hold rates high for too long. They acknowledge this risk, but feel the threat of under-tightening is far greater than the opposite.
Focus on what’s in front of you… not behind you
Initial jobless claims showed 183,000 new claims filed last week. This is insanely low and shows that the labor market remains resilient to the most dramatic rate hike cycle in many decades. Most economists anticipated that the labor market would show more weakness by now. The strength in the labor market is providing hope to those who believe we can still achieve a soft landing.
I believe for this to happen, the Fed needs to stop hiking and be more aware of leading economic indicators and less focused on the average of the last 12 months of inflationary growth. We are seeing many deflation indicators, showing the Fed may have already achieved its goals. At this point, it will take time for the numbers to reflect the change.
Maybe this is as good as it gets
Mortgage bonds have improved and are now challenging their 200-day moving average. This is the strongest floor we have, and could signal a bounce higher in the near future. Unless tomorrow’s BLS report shows significant weakness in the labor market, this will likely be the lowest mortgage rate level we will see in the near term. But, if rates are able to break beneath this floor, we will see a nice improvement follow.