Job Growth Surges, Inflation Cools


Overview: Mortgage markets were very volatile over the past week, mostly due to two of the biggest economic reports of the month. The labor market data was stronger than expected, while the inflation figures were lower than anticipated. When the dust settled, the two contrasting results were roughly offsetting, and mortgage rates ended the week nearly unchanged.

 

The key Employment Report released on Friday displayed unexpected strength in nearly every area. The economy gained 528,000 jobs in July, far exceeding the consensus forecast of just 250,000. The leisure and hospitality sectors, still in the process of recovering from pandemic losses, gained an impressive 96,000 jobs. Overall, the economy now has slightly more jobs than in early 2020 prior to the pandemic. Average hourly earnings, an indicator of wage growth, were 5.2% higher than a year ago, and also well above the consensus forecast. The unemployment rate fell from 3.6% to 3.5%, below the consensus forecast, and matching the lowest level since 1969.


The Consumer Price Index (CPI) is a closely watched inflation indicator that looks at price changes for a broad range of goods and services. In July, CPI was 8.5% higher than a year ago, down from 9.1% last month, and below the consensus forecast. Core CPI excludes the volatile food and energy components and provides a clearer picture of the longer-term trend. Core CPI in June was 5.9% higher than a year ago, the same annual rate of increase as last month, and also below the expected levels. Core CPI peaked at 6.5% in March, the highest reading since 1982.

The mixed economic news caused investors to flip-flop on the anticipated size of the rate hike at the next Federal Reserve meeting in September. A week ago, most investors had priced in a 50 basis-point rate hike, but the majority increased to a 75 basis-point increase after the Employment Report. However, they then shifted back to expectations for 50 basis points following the inflation data. Incoming economic news will continue to heavily influence the outlook for Fed policy in coming months, and higher than usual volatility in mortgage markets would not be surprising.

 

Core CPI (annual % change)

 

Week Ahead


Aug 16 — New Residential Construction report (aka Housing Starts)

Aug 17 — Retail Sales report

Aug 18 — Existing-Home Sales report