When Jobs Don’t Make a Difference
The first Friday of September 2014 was a weird one. The usual Bureau of Labor Statistics jobs report that was to be, in fact was not. There was much anticipation and expectation for another month of unbelievable job gains. The entire summer had been filled with employment gains of 200,000+ per month. In the end, although the smartest forecasters predicted a final tally of 225,000 net new jobs for the month of August, the end result was a paltry 142,000 jobs; the lowest monthly tally of the year. What was even more amazing was that the final figures for jobs in June were revised downward for a loss of 31,000 positions. The net effect was that mortgage rates dropped, as safety and security concerns became the buzzwords of the day. However, this wasn’t the final effect.
As the day continued, the bond markets weakened and the nation’s banks adjusted their rates upwards, over and over, inch-by-inch. By the afternoon, all of the gains that the horrible jobs report cited were erased, as rates that flirted with 3.875% were back up to 4.125%. The momentary break in the action that brought terror to the economy, but delight to borrowers and mortgage professionals was gone.
The week had been an amazing one for the history books. Rates increased higher and higher as speculation grew for a jobs report that was going to yield the highest job growth of the summer. Unfortunately, it was not to be. In fact, a double whammy occurred. Domestically, the jobs report was dismal. Internationally, the European Central Bank (ECB) capitulated and decided to follow the Federal Reserve Bank’s lead by instituting a bond purchase program, along the order of QEI, II, and III. With an exasperating jobs report and the announcement of the ECB purchase program, rates should have solidly broken through the 4.00% floor; but uncharacteristically, it was not to be.
This type of market behavior is completely out of form. It runs counter to academic textbooks, mortgage theory and common sense. Normally, as the markets show economic weakness, investors of all sorts flood into safe investments; namely, treasuries and mortgage backed securities; commensurately, interest rates fall. So why not in this instance? We have global turmoil in the form of beheadings in the Middle East, unprecedented corporate losses in Germany, and brand name Italian clothiers financially strapped. At home, fewer people are getting full time jobs, pessimism is still grabbing a hold of the majority of people’s sentiments, and the unemployment rate is only falling because more people are giving up the search. We would completely expect rates to fall, right? At other times in the past, the mere mention of a bad jobs report could send rates down 0.5% – 1.00%, but not this time. The reverse occurred. Why?
It could very well be that investors of all sorts around the world are ignoring the data. The underlying belief could be that the recent economic anemia was just a blip or an economic bump in the road. Historically, August jobs data is revised upward by approximately 100,000 jobs. It could be that financial historians believe that the same will occur this year, and that we should wait for the final adjusted figure to be revealed. Other speculation is that the market is no longer convinced that a weak job report is still the best measuring stick for the true state of employment in the United States.
Thus, where does that leave us in the prognostication of interest rates? What reliable piece of data can we use? If dismal job growth, global instability, consumer depression along with price deflation won’t do it, what will? Clearly, we are living in a time of caution. Given the unprecedented events that have followed the Great Depression, I conclude that there is no one magic or silver bullet that can be used to predict which way interest rates are going to go, as the ones that we relied on in the past don’t work anymore. However, I believe that once the world’s economies begin growing without Central Bank assistance, then we will know what the new economic levers will be that will move and shake the markets. Until then, we will be guessing, because to a large extent, the market’s movements are artificially generated and manipulated by Central Bank monetary stimulus and large institutional investors as opposed to good ole’ fashioned economic “big” data.
As has been said since the printing of Guinness’ first volume back in 1955, when speaking of the lack of movement in this interest rate marketplace, this is truly one for the record books!
Preston Howard is a mortgage broker and Principal of Rose City Realty, Inc. in Pasadena, CA. Specializing in various facets of real estate finance; he can be reached at email@example.com.