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Enormous Labor Market Surprise

Overview: There was no shortage of major economic news over the past week, including an absolute stunner of an Employment Report and a Federal Reserve meeting. These events were roughly offsetting, however, and mortgage rates ended just slightly lower.


In April, the economy lost an unprecedented 20 million jobs, and the consensus forecast for May was for a massive decline of another 8 million. To put these shocking figures in perspective, typical monthly readings in 2019 were for job gains of around 200,000.

The actual results for May, released on Friday, revealed one of the greatest surprises of all time in an economic report. Rather than the anticipated additional losses, the economy added a massive 2.5 million jobs in May. With the gains, the unemployment rate dropped from 14.7% to 13.3%, well below the consensus forecast for an increase to 20%. In general, the sectors hurt the most when the pandemic shut down much of the economy showed the most substantial improvement. Based on this report, it appears that the economic recovery is occurring more quickly than expected. Since faster economic growth raises the outlook for future inflation, this was negative for mortgage rates.

At Wednesday’s meeting, the Fed held the federal funds rate close to zero and projected no rate increases through at least 2022. The most notable news for mortgage markets concerned future plans for bond purchases. Since the middle of March, the Fed has bought over $2 trillion in Treasuries and mortgage-backed securities (MBS) to help maintain market stability, but it has been slowly reducing the quantity of its purchases each week. At this meeting, however, the Fed announced that it now will buy bonds “at least at the current pace” in coming months, signaling an end to the gradual reductions. This unexpected increase in demand should be positive for bonds, and mortgage rates declined after the announcement.

Week Ahead

Looking ahead, investors will continue watching for news about medical advances to fight the pandemic, plans for reopening the economy, Fed actions, and government stimulus programs. In addition, the Retail Sales report will be released on June 16. Since consumer spending accounts for about 70% of all economic activity in the U.S., retail sales data is a key indicator of financial conditions. The New Residential Construction report (also known as Housing Starts) comes out on June 17.

Monthly Job Gains (millions)

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