Market Update: Rates Recover in Response to Jobs Data; Big Inflation Report Scheduled for This Week

Blog posted On August 08, 2023

Mortgage rates fluctuated throughout last week. While they initially trended higher after Wednesday’s ADP employment change report, they reversed the trend after Friday’s weaker-than-expected employment situation reports. This week, we have July’s consumer price index (CPI), which could shake things up for rates.

What happened with jobs reports and why does it matter for me?

Right now, there are two main sets of economic data that have an effect on rates: inflation reports and jobs reports. Though these reports don’t directly dictate rate movement, they do influence it. Why? For a couple of different reasons.

Jobs data is one of the most closely watched set of economic reports at the moment. The central bank is looking for a turning point in jobs data that signals the economy is cooling off. It sounds backwards, but when it comes to rates, a weaker economy is generally better. When the economy is strong, jobs are booming, and spending is high, demand in the bond market is lower, which pushes prices and consequently interest rates higher. So right now, lower jobs data = better for rates.

Here's a brief snapshot of what happened last week with jobs reports and rates:

• Job openings were LOWER than expected (potentially positive for rates)
• ADP nonfarm employment change was HIGHER than expected (negative for rates)
• The employment situation was largely worse than expected (positive for rates, led to big downward trend)

Big inflation impact coming up this week

Inflation and jobs data are two the two primary indicators of the economy’s strength right now. A strong economy sounds good, but when consumer spending and inflation get too hot, they can start to have negative effects. One of those effects is higher interest rates. It’s no coincidence that a year ago, when inflation was at 40-year highs, mortgage rates were also at their highest level in decades. This is why the central bank, the Federal Reserve, likes to keep inflation at around 2%.

Here’s how inflation can impact rates:

• Inflation also is the enemy of the bond market (which influences rates)
• When inflation is high and the economy is strong, the bond market tends to be weaker
• This has been making rates trend higher

Coming up this week we have the consumer price index, a leading inflation report. If inflation continues to cool on the index, it will be welcome news.

Stay tuned for more updates and let us know if you have any questions!

Sources: Bloomberg, Mortgage News Daily