Strong Jobs Report Boosts Odds Of Fed Rate Increases

Wow! A surprisingly upended July Jobs Report added 528,000 jobs and pushed the unemployment rate down to 3.500%.  Odds of a .75 bp increase in Fed Funds spiked after the report was released and bonds sold off swiftly.  While indications like poor retail earnings reports and lower oil and commodity costs support the notion that the economy is slowing, the Jobs Report does not suggest this to be the case. This will embolden the Fed to raise rates faster and further. How this plays out will be of great debate over the coming months. For now, the equity markets took the report in stride and the Dow Index was actually up (as I write my comments).  

When it comes to the economy, traditional signs of movement now indicate uncertainty. Below are a few observations on how difficult it is to predict what the future of the economy holds.

1. The yield curve is inverted, quite possibly the most reliable indication that the economy may be in a recession, yet junk bond yields have not blown out.
2. Wages are not keeping up with inflation, but consumers continue to spend, and defaults on credit card and auto loans remain low.
3. Housing has slowed as interest rates have risen but supply still remains below demand for now and prices have only fallen mildly in Southern California (Insignia Mortgage lends in CA).
4. The equity market has ripped higher even as revenue and earnings show signs of deterioration
5. Many other developed nations are hiking rates as well, and the UK not only hiked but stated with conviction a recession is imminent.

Jobs Report And Mortgages

The Jobs report is not helpful in interpreting the mortgage market, as mortgage rates soared after the report’s release. It may be wise to listen to the “Fed Speak” which has a unified opinion that expecting interest rates to fall by sometime next year is wishful thinking. Inflation remains the primary worry for the Fed as the longer high rates of inflation stick around, the more embedded into the economy it becomes. As housing inventory picks up, buyers will resurge as prices adjust to a more restrictive lending and interest rate environment. One positive this week is the re-emergence of some non-QM lenders, who really help the self-employed borrower or unique borrower scenario (as these types of loans do not have to fix into a specific underwriting box). More on this in the weeks to come.

Some other things to consider…Should bond traders change their tune on the state of the economy, interest rates could move up quickly. It is also important to note that Fed balance sheet reduction goes into overdrive in September, with 95 billion per month of run-off.