06 Nov Rising rates/Locking bias
Just like a perfect title to a country song, “I feel a strong one coming on” should have been the title of yesterday’s market update. And a strong one it was, with the Bureau of Labor Statistics (BLS) reporting that 271,000 new jobs were created in the month of October. This was much higher than the 190,000 anticipated by most economists and reflects the largest single month gain so far in 2015. In addition, the prior two month’s reports were revived higher, adding an additional 12,000 new jobs to the US labor force.
Also reported this morning was a drop in the Unemployment Rate, falling from 5.1% down to 5%. Although anticipated, hitting this psychological level is sure to play within the minds of investors who understand the threat a strong labor force presents to inflation risk. As the labor force tightens, employees are able to demand more pay to fend off offers of higher pay from competing employers. This forces employers to raise their prices to maintain profitability. Also, employees then have more disposable cash flow to further fuel the US economy; a perfect storm for higher mortgage interest rates. In fact, look no further than the Average Hourly Earnings report to support this claim. Earnings increased 0.4% last month, which was much higher than the 0.2% anticipated. With the force in play, the threat to higher interest rates is highly probable.
To say that this report was significant would still be an understatement. The Federal Reserve has stated over the years the significance of achieving a 5% or lower unemployment rate. With job growth as strong as it now is and with the unemployment rate at 5%, the pressure will be strong for the Fed to raise interest rates at their December meeting. Given the bond market’s reaction to this highly anticipated event, we can expect to see greater volatility and higher mortgage interest rates. We will maintain our locking bias.