Stocks, Bond Market, Mortgage Rates Move on Fed Speculation
The May jobs report came in as “moderate,” “sluggish,” or “tepid” depending on who you ask, but the major stock indexes shot up with the news. What was going on?
Payrolls added 175,000 new positions in May, which apparently struck the appropriate balance of “just good enough” but “not too good” such that investors believe the Federal Reserve will continue with its easing policy.
From Patti Domm, executive editor at CNBC.com in her article “Markets See Summer of Fed Easing at Full Speak Ahead”:
Traders viewed the May jobs report as strong enough to signal continuing economic growth, but not so strong as to push the Fed toward a wind down of easing.
Markets are more preoccupied with anticipating Federal Reserve action than the flagging U.S. economic. Domm continues:
The markets have been fixated on when the Fed will begin to slow down its bond purchases, and there’s been a lot of volatile trading as Fed officials discussed “tapering” purchases in the past several weeks.
The manufacturing sector is contracting, U.S. GDP is down, and employment growth remains well below the pace needed to recapture the recession’s lost jobs. Rising mortgage rates figure to stem demand in the housing market, which has been one of the success stories of the recovery.
These are very real concerns about the U.S. economy, but the data has been discussed primarily in relation to “QE3”, the Fed’s $85 billion in bond purchases per month. This has been the major market mover.
Employment Rate Rises to 7.6%
The May employment report itself played second fiddle to concern about its meaning vis-a-vis Federal Reserve action.
Payrolls added 175,000 jobs in May, right about at expectations, and the unemployment rate ticked up to 7.6% as more people entered the workforce.
Construction added 7,000 jobs during the month.
Mortgage Rates Continue to Rise
Mortgage rates rose by about 1/8 of a point across the board on Friday, as the traders continue to leave the bond market in anticipation of Federal Reserve tapering. Without the guaranteed source of demand in the bond market, mortgage rates will lose a major source of downward pressure.
Might we be looking at a 5% 30-year fixed in the coming months? We aren’t there just yet, and Dan Green points out situations that could send rates spinning lower. Poor U.S. or European economic news, or a random “shock” to the system would have such an effect.
For more on the future of mortgage rates, check out our article where we ask “has the discount window closed?”