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Strong Job Gains Mean Higher Rates

Strong Job Gains Means Higher Rates

A wide range of reports in the U.S. and Europe over the past week indicated improving economic conditions. Unfortunately, good news for the economy is generally negative for mortgage rates, which moved higher.

Following stronger than expected manufacturing and construction data earlier in the week, Friday’s Employment report exceeded forecasts in nearly every area. Against a consensus forecast of 225K, the economy added 280K jobs in May. The Unemployment Rate did rise to 5.5%, but the increase was due to an unexpectedly large number of people entering the labor force in May, a sign of strength.

Average Hourly Earnings were 2.3% higher than a year ago, exceeding the consensus. The strength in job gains and wage growth raised expectations for future inflation and brought forward the expected timing of the first federal funds rate hike.

The economic data in Europe also was unfavorable for mortgage rates. In particular, the eurozone inflation data released over the past week was higher than expected. Comments from the President of the European Central Bank (ECB) suggested that inflation is expected to continue to increase in the region. Investors are concerned with how the data might influence the bond purchase program of the ECB.

Mixed news about the situation in Greece caused volatility in mortgage rates over the past week. Greece was allowed to defer its debt obligations until the end of the month, allowing more time for negotiations. It’s not clear how close Greek and eurozone officials are to reaching a bailout agreement.

Next week, the JOLTS report, measuring job openings and labor turnover rates, will come out on Tuesday. Retail Sales, which account for roughly 70% of economic activity, will be released on Thursday. The Producer Price Index (PPI), which focuses on the increase in prices of “intermediate” goods and services used by companies to produce finished products, will come out on Friday. There will be Treasury auctions on Tuesday, Wednesday, and Thursday. Investors will be keeping an eye on the negotiations between Greek and eurozone officials as well. 

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