Stronger than expected economic data was unfavorable for mortgage markets last week. In particular, the key labor market report far exceeded the forecasts, and mortgage rates ended the week higher.
The closely watched Employment report released on Friday displayed unexpected strength nearly across the board. Against a consensus forecast of 250,000, the economy gained 528,000 jobs in July. The best performance was seen in the leisure and hospitality sectors, which gained 96,000 jobs. The economy now has more jobs than in early 2020 prior to the pandemic.
The unemployment rate fell from 3.6% to 3.5%, below the consensus forecast, and matching the lowest level since 1969. Average hourly earnings, an indicator of wage growth, were an impressive 5.2% higher than a year ago and well above the consensus forecast.
A couple of other significant economic indicators released this week from the Institute of Supply Management (ISM) painted a picture of shifting consumer spending habits. The national services sector index ended several straight months of declines with an unexpected jump to 56.7, well above the consensus forecast of 54.0. By contrast, the national manufacturing sector index posted an expected drop to 52.8. Still, levels above 50 indicate that the sectors are expanding. Consistent with other recent data, these two reports suggest that consumers are purchasing more services and fewer goods.
The stronger than expected economic data released this week caused many investors to anticipate a larger rate hike at the next Fed meeting in September. Last week, most investors had priced in a 50-basis point rate hike, but the majority now price in a 75-basis point increase. There is also an ongoing debate about what will happen next year. The current investor outlook is for additional rate hikes later this year followed by rate cuts next year, as economic growth and inflation decline. Comments this week from several Fed officials suggested that investors were pricing in too high a probability of rate cuts next year given the uncertain outlook for the path of inflation.
Looking ahead, investors will watch for additional Fed guidance on the pace of future rate hikes and bond portfolio reduction. Beyond that, the focus will be on the inflation data. The Consumer Price Index (CPI) will be released on Wednesday. CPI is a widely followed monthly inflation indicator that looks at the price changes for a broad range of goods and services. The Producer Price Index (PPI), measuring price changes for intermediate goods used to make finished products, will come out on Thursday.
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Raleigh Mortgage Group, Inc.
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