Unemployment Rate Down; Mortgage Rates Up

February 9, 2011 by · Leave a Comment 


While the headline number fell short, last week’s Employment report was considered to be positive overall, and mortgage rates moved higher after the news. Against a consensus forecast of the addition of 140K jobs, the economy added just 36K jobs in January. The Unemployment Rate was expected to increase to 9.5% from 9.4% in December. Instead, it dropped to 9.0%, the lowest level since April 2009. Economists suggest that a number of factors were responsible for the divergence between the two sets of data. First, bad weather distorted the results in many regions. Second, the Unemployment Rate reflects both smaller companies and larger companies, while the payrolls data captures only larger companies. Finally, the January data tends to be the least reliable month of the year. After examining the details, investors placed more weight on the growth in jobs among the small businesses and self-employed, and they expect the payrolls data to “catch up” in future months.While unemployment is down, mortgage rates are pushing higher. Gradual increases 6 out of the last 7 days have pushed the 30 year Conforming benchmark rate over 5% for the first time since tax day, April 15th of last year. This surge in rates has taken place for the following three reasons:

 1. Stronger than expected economic growth. All of the news has not been positive but enough positive news has come out to put upward pressure on rates. As a result, investors continue to increase their outlook for growth in the US and other countries.

 2. Inflation concerns. Out of the blue, inflation seems to be an issue and a concern again. The pick-up in global economic growth has increased the demand for commodities, which has driven their prices higher. These higher prices have raised investor fears that future inflation may increase. Many developing countries already have had to deal with rising inflation, and readings in Europe have moved higher recently as well. In the US, Fed officials tend to focus on core inflation (which excludes food and energy), and these measures have been extremely low. According to Bernanke, slow wage growth and slack in the US economy will help keep core inflation in the US low for quite a while. This has allowed Fed officials to keep monetary policy loose to boost the economy. Investors, though, have grown more concerned about the risk that the Fed’s stimulative policies will lead to significantly higher long-term inflation.

3. Weak Treasury Auctions. There has been weaker than average demand at the Treasury auctions the last two weeks. As demand diminishes, rates increase.