So what’s going on? Why are rates rising? Last week saw constant pressure on mortgage backed securities as part of a secular trend. German bund yields rose and MBS sold off as major bond traders continued to move money out of low return (but very safe) bonds. Hedge funds are done with camping money in bonds for the past two years in exchange for safety. There are seeking actual profits now and leaving the safety of U.S. bonds…its risk on!
The biggest domestic story of the week was Jobs, Jobs, Jobs as the bond market knows that the Fed is paying very close attention to wage inflation. And we certainly received several different reports that showed a tightening of labor slack in our economy. Personal Income increased by 0.4% and the ISM Manufacturing Index showed a big increase in their employment index. ADP Private Payrolls were stronger than expected with a 201K reading and the number of announced corporate job cuts plummeted from 61.5K down to only 41K in the Challenger Job Cuts report. Non-Farm Productivity tanked due to Unit Labor Costs that shot up 6.7%.
And then we had Friday’s jobs reports where across the board, this report showed strength in the labor market and gave MBS every reason to sell off even more. The May NFP was higher than expected (280K vs est of 220K), plus the last two months saw upward revisions of 32K which is also very important.
The Unemployment Rate ticked upward from 5.4% to 5.5% but that is a good thing as it was artificially too low due to a skewed and an all time low participation rate. With more legitimate humans seeking employment, it causes the Unemployment Rate to increase until they find a job.
But the REAL STORY was the Average Hourly Earnings which were three times higher than in April and beat market expectations (0.3% vs est of 0.2%). This is the KEY to the Fed’s timing of their first rate hike as Janet Yellen has been very clear that wage inflation is more important to her than commodity inflation.
There are some major economic reports that will hit the market this week. They each have the ability to affect the pricing of Mortgage Backed Securities and therefore, interest rates for Government and Conventional mortgages. I will be watching these reports closely for you and let you know if there are any big surprises.
It is virtually impossible for you to keep track of what is going on with the economy and other events that can impact the housing and mortgage markets which is why we do it for you.
