Job gains surge

Investors, highly focused on the economic data, had a lot to consider this week. The Economic Calendar was packed, and nearly all the major reports exceeded expectations. Stronger economic growth is negative for mortgage rates, and rates ended the week higher.

A shockingly strong Employment report caused a swift increase in mortgage rates on Friday. Against a consensus forecast of 120K, the economy added 204K jobs in October, and the figures from the prior two months were revised higher by 60K. The Unemployment Rate, however, rose from 7.2% to 7.3%. The increase in the Unemployment Rate was influenced by the government shutdown during the first half of October. The headline figure of 204K jobs is based on a survey which counts furloughed government workers as employed, while the Unemployment Rate is based on a different survey which counts them as unemployed. Before the data, most investors had expected that the Fed would begin to taper its bonds purchases in March or April. If the pace of job creation continues at this level, though, the Fed could begin to scale back sooner.

In similar fashion, the Gross Domestic Product (GDP) report, the broadest measure of economic growth, was much better than expected. Third quarter GDP rose to 2.8%, well above the consensus of 2.0%. The reaction in mortgage markets was somewhat limited, though, since the details did not quite indicate the same strength as the headline number. Part of the outperformance was due to an unexpectedly large increase in inventories, which means that some growth was “pulled forward” from the fourth quarter. The extra goods produced during the third quarter which caused inventories to expand will reduce production in the fourth quarter.

Also Notable:

  • Core PCE inflation was just 1.2% higher than one year ago
  • Consumer Sentiment declined to the lowest level since Dec. 2011
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