Economic Commentary for November 12th, 2014: Unemployment Rate Drops

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A variety of factors caused volatility in mortgage rates to pick up over the past week. The Employment Report, comments from Fed officials, and tensions in Ukraine were the main influences. They were offsetting to a large degree, however, and mortgage rates ended the week just a little lower.

The Employment Report released on Friday showed another month of job gains above 200K in October. The 220K monthly average so far in 2014 is the fastest pace since 2006. The Unemployment Rate unexpectedly declined from 5.9% to 5.8%. For mortgage rates, the most notable aspect of the report was that wage growth increased at just a 2.0% annual rate. The low level of wage inflation helped mortgage rates decline.

Some of the improvement in mortgage rates reversed on Monday, though, when Fed officials late Friday began to warn investors that the eventual rate hikes could cause “some degree of market turbulence”. Fed officials expect to begin to raise the fed funds rate sometime next year. On one hand, the labor market has improved faster than forecasted by the Fed. Last December, the Fed forecast was for the Unemployment Rate at the end of 2014 to be between 6.3% and 6.6%, well above the level of 5.8% already achieved. On the other hand, the low level of inflation provides little pressure to rush to raise the fed funds rate.

The conflict in Ukraine has not been a significant influence on mortgage rates in recent weeks, but on Friday investors were reminded that geopolitical concerns could become a factor at any time. Reports on Friday that Russian tanks crossed into Ukraine caused investors to shift to safer assets, helping mortgage rates improve. The situation did not escalate, though, and mortgage rates partially reversed direction on Monday.

Looking ahead, the JOLTS Report, measuring job openings and labor turnover rates, will come out on Thursday. Retail Sales, which account for roughly 70% of economic activity, will be released on Friday. In addition, there will be several Fed speakers over the next couple of days, including a speech by Fed Chair Yellen on Thursday. In Europe, third quarter euro zone GDP, the broadest measure of economic growth, will be released on Friday.

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