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Strong Jobs and Inflation

Overview: Over the past week, stronger than expected labor market and inflation data was negative for mortgage markets, and rates rose a little from record-low levels.


Friday's closely watched labor market report showed signs of a stronger than expected economic recovery. In July, the economy added a massive 1.8 million jobs, which was above the consensus forecast for an increase of 1.5 million. Strength was seen in hospitality, government, retail, business services, and health care. Over the last three months, the economy has gained back about 9 million of the roughly 24 million jobs lost during March and April.

The key data from other areas of the report also far exceeded expectations. The unemployment rate dropped sharply from 11.1% to 10.2%, which was better than the consensus forecast of 10.5%. Average hourly earnings, an indicator of wage growth, increased modestly from June and were 4.8% higher than a year ago. Since stronger than expected economic growth raises the outlook for future inflation, this news was negative for mortgage rates.

The latest report on current inflation levels released on Wednesday was unfavorable for mortgage rates as well. The Consumer Price Index (CPI) is a widely followed monthly inflation report that looks at the price change for goods and services. In June, core CPI, which excludes the volatile food and energy components, was 1.6% higher than a year ago, which was far above the consensus forecast of 1.1% and up from an annual rate of increase of 1.2% last month. Prior to the pandemic, core CPI was consistently above 2% on an annual basis.

Week Ahead

Looking ahead, investors will continue focusing on news about medical advances to fight the pandemic, Federal Reserve monetary actions, government stimulus programs, and the pace of reopening the economy. Beyond that, the Retail Sales report will be released on Friday. 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. The New Residential Construction report (also known as Housing Starts) will come out on Tuesday.

Core CPI (annual % change)

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