Weaker than expected economic data and a lack of surprises from the Fed initiated a large rally for mortgage markets this week. In particular, the key Employment report and the manufacturing sector data saw downside misses, causing investors to reduce their outlook for economic growth. After reaching their highest levels in over two decades, mortgage rates ended the week sharply lower.
In October, the economy added 150,000 jobs, below the consensus forecast of 180,000, and roughly half the gains seen last month. In addition, the results for prior months were revised lower. The largest gains were seen in health care, government, and construction. Manufacturing posted a decline, mostly due to the auto strikes
The other major components of the report also were positive for mortgage markets. The unemployment rate unexpectedly increased from 3.8% to 3.9%, the highest level since January 2022. Wage growth continued to moderate. Average hourly earnings increased 0.2% from August, slightly below the consensus forecast. Earnings were 4.1% higher than a year ago, down from an annual rate of increase of 4.3% last month and the lowest level since June 2021. Fed officials keep a close eye on wage growth because it generally raises future inflationary pressures.
Two other significant economic reports released this week from the Institute of Supply Management also came in below the consensus forecasts. The ISM national services sector index dropped to 51.8, the weakest level since May. The ISM national manufacturing index was just 46.7, close to the lowest level since May 2020. Since readings above 50 indicate an expansion in the sector and below 50 a contraction, this data continues to highlight the consumer preference for services over goods this year. Also notable, this was the twelfth straight month of readings below 50 for the manufacturing sector, the longest streak in a bout 15 years.
As expected, the Fed made no change in the federal funds rate on Wednesday, and the statement released after the meeting was very similar to the prior one. This was the second consecutive meeting that the Fed chose to hold the rate in a target range of 5.25% – 5.50%, following a series of 11 hikes since the beginning of 2022. According to Chair Powell, there is still “a long way to go” to get inflation down, but the risks of the Fed doing too much or too little going forward have become more balanced. He again emphasized that future decisions will be determined by incoming economic data. In short, investors received l little new information to alter their outlook for Fed policy.
Investors will continue to watch for Fed officials to elaborate on their plans for future monetary policy. It will be an extremely light week for economic reports. The Trade Deficit will be released on Tuesday and Consumer Sentiment on Friday.
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