Mortgage Rates



This morning’s March employment report shocked markets with its weakness. Non-farm jobs were widely expected to have increased 201K, as reported up just 120K; non-farm private jobs were expected up 224K, as reported +121K. The unemployment rates declined to 8.2% frm 8.3% suggesting more people are not looking for jobs. On Wednesday ADP said private jobs increased 209K. The bond and mortgage markets rallying hard this morning, at 9:00 the 10 yr note yield at 2.08% down 10 basis points frm yesterday’s close and mortgage prices +16/32 (.50 bp). Employment data has always been difficult to forecast, usually there is a burst of volatility on the data, today is one major example. If the stock market were trading today the DJIA would open down 150 points based on trading in the futures markets. The Feb jobs originally reported +227K was revised to 240K; Jan jobs originally reported +284K revised to 275K. A smaller than forecast addition of 120,000 jobs last month broke a pattern that was giving U.S. voters a growing sense of security.

The very weak March employment data will increase the idea the Fed may consider another easing; we have held the Fed would not ease again, but if employment continues to be soft the Fed has the evidence it needs to ease again if necessary. Although the odds have increased as a result of the employment data, and somewhat confirms what the Fed has been concerned about that the economic recovery is not on solid footing; another easing may be unnecessary as long as interest rates stay low. With today’s sharp drop in rates, and the declines this week, the Fed doesn’t have to ease.

What now appears to be a weaker economy that had driven equity markets to four year highs, has changed the near term outlook on the surprisingly weak employment data. Not only the economy but Europe, after a couple of months of stability, is now back on the front page. Two days ago Spain’s Prime Minister rocked markets with his comment that its economy is in“extreme difficulty,” renewing the possibility that another bailout will be needed. The two events has changed the outlook for the bond and mortgage markets for the moment. Today’s improvement in the bond and mortgage markets turned most of our technical work from generally neutral to bullish. When markets open on Monday we expect the recent increase in volatility to continue. We were not looking for rates to decline much, with safety trades back on Europe and the very weak employment report today the outlook has changed. From now until the next FOMC meeting on April 25th the debate on another Fed ease will dominate thinking and be influenced on every data point between now and then.