Market Update: Stronger than expected job reports, rates increasing materially over the last 1.5 weeks from recent lows
This week has been a reminder that rates are not on a one-way trip down. There are still a lot of market factors that will make this ride down choppy.
As of now, the inflation numbers appear to be moving in the direction of the Fed’s goal of 2%. In fact, if you take the numbers from the last 6 months and annualize, we are under the 2% target.
However, the labor market continues to show resilience and that has been the primary driver this the movement in the 10 yr up to now 4.05, after peaking at 4.07 earlier this morning after the data release. This is up 28 BPS+ from the 3.77 – 3.79 low. In addition, the spreads between mortgages and the treasury over the last week has also widened from 134 BPS recent low to now back at 150 BPS. This means that mortgages lost 16 BPS more than the market movement due to wider spreads.
In our last market call we talked about the market getting ahead of themselves on pricing in 80% chance for a cut in March and that I felt that the proper range making that more of a 50/50 chance is in the 4.05 – 4.20 range. We are now in the bottom of that range and the market is walking back its 80% chance back to where I felt is more reasonable. The market is still pricing in over a 65% chance, but it is getting closer to where I felt the likely range is. With continued strong job numbers, this % will drop as we get closer. We will have to wait and see once we get into mid-January and past the holiday data if these numbers will begin to deteriorate. I believe they will come middle to end of January readings and into February.
Below is the summary from today’s results on Non-Farm Payrolls and Unemployment. The NonFarm Payrolls increase to 216k was materially over the 175k estimate. Private payrolls also came in much higher at 164k vs. the 130k estimate. However, the revisions were also very material with the reduction of 71,000 jobs over the prior 2 months. So, when I personally look at these numbers, I show a flat reading when you account for the large 71k reduction in previous reports. The market appears to be trading this as a strong jobs report even with the large revision. Or, simply put the market is realizing it is ahead of itself with prior pricing in the 80% chance for the cut in March. So far, we don’t have the data to support that.
With the above data, along with more people leaving the labor market by the definition that they use, Unemployment remained at 3.7%, below the 3.8% expectation.
With an overall reading that does show a slowdown but does not show the cracks needed to keep things moving, we are experiencing a move with yields coming back up and rates up with them. The movement off the lows has the mortgage market around 100 – 150 BPS depending on the note rate than it was 1.5 weeks ago.
Again, it is not going to be a straight path down and this could take time.
* DEC. NONFARM PAYROLLS RISE 216K M/M; EST. +175K
* DEC. PRIVATE PAYROLLS INCREASE 164,000; EST. 130K
* MANUFACTURING PAYROLLS RISE 6,000 IN DEC.
* REVISIONS SUBTRACT 71,000 U.S. JOBS IN PRIOR TWO MONTHS
* DEC. UNEMPLOYMENT RATE 3.7%; EST. 3.8%
* DEC. AVERAGE HOURLY EARNINGS RISE 0.4% M/M; EST. +0.3%
* DEC. AVERAGE HOURLY EARNINGS RISE 4.1% Y/Y; EST. +3.9%
* DEC. AVERAGE WORKWEEK AT 34.3 HOURS; EST 34.4
Josh Erskine
Chief Executive Officer
CalCon Mutual Mortgage LLC dba OneTrust Home Loans
Yellowstone RE Holdings LLC
Yellowstone Global Investments LLC