August 4th, 2023 11:00 PM by Narbik Karamian
8/4/2023
This week mortgage rates reached their 22 year high and we asked if there was any hope for relief and concluded that the only question was about timing. Timing would depend on economic data and inflation. Mortgage rates got a glimpse of friendly economic data today following the jobs report from the Labor Department (The Bureau of Labor Statistics or BLS report). It was still very strong in a historical context, but not quite as strong as economists had predicted. The not so quite strong numbers indicate a slowdown in hiring.
Up until todays BLS report, rates were in a bit of a panic mode this week due to combination of other data and events. Wednesday was saw the biggest jump after the ADP employment data and an announcement regarding the government's anticipated borrowing needs (via Treasuries). Private businesses in the US hired 324,000 workers in July 2023, surpassing market expectations. This was an indication that the economy is still strong.
The main difference between the ADP Employment Report and the official BLS report is that ADP only covers non-farm, private employees. As a government body, the BLS survey also includes government employees
U.S. Treasuries are at the core of the rate market. When investors become less interested in buying them or when the government becomes more interested in selling them, rates rise. The ADP data hit the demand side of the equation and the Treasury announcement hit the supply side. We can see how things played out in the following chart of 10-year Treasury yields as well as the much-needed response to Friday's more important jobs report.
Despite Friday's recovery, current rate levels are still uncomfortably close to long-term highs. Mortgage rates only made it back to Monday's levels (30yr fixed index still over 7%). In order to get meaningfully into the 6's, we'll need more data that comes in cooler (weaker) than the market expects.
So what's the next big economic report to watch? Easy! The Consumer Price Index (CPI) on Thursday, August 10th. CPI is the only other piece of scheduled monthly economic data that could compete with the jobs report over the past 2 years when it comes to impact on rates. The last CPI report was good for rates, but the market needs to see a pattern that's repeated for several consecutive months. If inflation is lower than expected this time around, it would be a solid step in that direction, one that likely allows rates to continue to moderately come down after this week's push toward long-term highs.