Overview: Over the past week, stronger than expected labor market data was negative for mortgage rates, while the election results were positive. The net result was that mortgage rates ended the week slightly higher.
Friday's highly anticipated monthly Employment Report revealed another month of improvement in the labor market that was well above average. In October, the economy added 250,000 jobs, far exceeding the consensus forecast of 190,000. The job growth was spread across many sectors of the economy, including health care, construction, and manufacturing. The unemployment rate remained unchanged at 3.7%, which is the lowest level since 1969. Since faster economic growth raises the outlook for future inflation, this news was unfavorable for mortgage rates.
In addition to solid job gains, the pace of wage growth jumped to a multi-year high. In October, average hourly earnings were 3.1% higher than a year ago, up from 2.8% last month, and the largest annual rate of increase since 2009. Since the data point which “dropped off” and was replaced by the most recent reading to determine the current 12-month average was a weak one, investors were expecting this increased level of wage growth.
Tuesday’s election produced the outcome viewed as most likely by investors. Democrats took control of the House, while Republicans maintained an edge in the Senate. Investors expect that this will result in more gridlock and less government spending. If this takes place, it would mean that fewer bonds would need to be issued to fund the budget deficit, which would be positive for bond yields, including mortgage rates.
Looking ahead, the next Federal Reserve meeting will take place on Thursday. Investors do not expect the Fed to raise the federal funds rate, but they will be looking for guidance about the pace of future policy changes. After that, the Consumer Price Index (CPI) will come out on November 14. CPI is a widely followed monthly inflation report that looks at the price change for goods and services. The Retail Sales report will be released on November 15. Since consumer spending accounts for about 70% of all economic activity in the U.S., the retail sales data is a key indicator of growth.