Economic Commentary for May 30th, 2013: Labor Market Outlook Improves

Jobless Claims

Despite a lack of major economic news over the past week, mortgage rates have moved a good deal higher. There was a shift in investor sentiment out of bonds and into stocks. Another strong reading for weekly Jobless Claims was part of the cause.

Weekly Jobless Claims measure the number of new claims for unemployment benefits. This week’s release of Jobless Claims showed a decline to 323K, the lowest level since January 2008, and the third straight week that Jobless Claims were below the 350K level. During the worst of the financial crisis, Jobless Claims peaked at levels nearly twice as high. Jobless Claims have finally returned to the levels seen before the financial crisis. Combined with the stronger than expected Employment report last week, the recent Jobless Claims data points to an improving labor market.  Increased jobs are great for the economy and for the housing market.

For mortgage rates, the improved outlook for the labor market has been negative. Gains in employment increase expectations for future inflation. In addition, the Fed has tied the end of its bond purchase program to an Unemployment Rate target of 6.5%. Recent data suggests that we may reach this target sooner than expected. This negative trend in bond prices has been in place since the release of the April Employment report on May 3rd.

Looking ahead, investors are eager to see the detailed FOMC Minutes from the Fed meeting which will come out on May 22. Fed officials are divided about the expected duration of the bond purchase program, and the Minutes will reveal the latest thinking. Investors also will be watching the inflation data and the housing data over the next couple of weeks. ECB officials have hinted that they are prepared to add stimulus measures if necessary, and investors will be keeping an eye out for ECB action.