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Impressive Job Gains

Overview: Over the past week, stronger than expected labor market data was negative for mortgage rates, and comments from Federal Reserve Chair Jerome Powell suggested that the Fed does not plan to change monetary policy to restrain yields from rising further. As a result, mortgage rates ended the week a little higher.


After several months of somewhat disappointing job growth mostly due to rising COVID case counts, the latest Employment Report revealed much greater improvement. In February, the economy gained a solid 379,000 jobs, which was roughly double the consensus forecast. The largest gains were seen in areas that were hardest hit by the pandemic, particularly the leisure and hospitality sectors. The unemployment rate unexpectedly fell from 6.3% to 6.2%. Average hourly earnings, an indicator of wage growth, were a healthy 5.3% higher than a year ago, matching expectations.

The reduced economic activity resulting from the pandemic caused a significant decline in inflation last year, which was one of the factors responsible for record-low mortgage rates. However, investors are now concerned that inflation will rise due to improving economic conditions. Whether that will happen later in the year is an open question, but for now, core inflation levels remain tame. In February, the closely watched core Consumer Price Index (CPI) was just 1.3% higher than a year ago, which was below the consensus forecast, and down from an annual rate of increase of 1.4% last month.

Last Thursday, Fed Chair Powell acknowledged the recent increase in long-term yields, including mortgage rates, but he did not give any indication that the Fed is concerned about it. According to Powell, Fed officials recognize that stronger economic activity may lead to higher inflation, but that it likely will be “transitory,” and the central bank will be “patient” before changing monetary policy. Some investors had hoped that Powell might indicate that policy changes were under consideration to help contain the rise in long-term yields.


Monthly Job Gains (millions)

Week Ahead

March 11 — European Central Bank meeting

March 16 — Retail Sales report

March 17 — New Residential Construction report (aka Housing Starts)

March 17 — U.S. Federal Reserve meeting


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