Overview: Over the past week, the primary focus was on Friday’s key labor market report, which revealed much stronger than expected results. In addition, major central banks in Europe shifted toward tighter monetary policy. Both events were unfavorable for mortgage markets, and rates ended the week higher.
The closely watched Employment Report significantly exceeded expectations. The economy gained 467,000 jobs in January, far above the consensus forecast of 150,000, and revisions added an enormous 709,000 jobs to the figures for prior months. Despite the rapid increase in COVID cases, the greatest improvement was seen in the leisure and hospitality sectors, which gained 151,000 jobs. For the entire year of 2021, the economy added 6.67 million jobs, a record level by a wide margin, as the economy recovered from the pandemic. The unemployment rate unexpectedly increased from 3.9% to 4%. However, this also reflected greater strength, since it was mostly due to a huge number of people returning to the labor force in January. Average hourly earnings, an indicator of wage growth, were a very healthy 5.7% higher than a year ago, up from an annual increase of 5% last month. Since stronger economic growth and wage gains increase future inflationary pressures, this report was unfavorable for mortgage rates. While the Bank of England (BOE) and the European Central Bank (ECB) meetings resulted in different actions, they both revealed an unexpectedly strong bias in favor of tighter monetary policy. Following its first 25 basis point rate hike in December, the BOE raised rates by another 25 basis points. By contrast, the ECB held rates steady, despite record-high inflation in January. However, comments made during the press conference caused investors to anticipate a rate hike as soon as the next meeting in March, much earlier than the outlook prior to the meeting. The prospect of tighter monetary policy in Europe caused global bond yields, including U.S. mortgage rates, to rise.
Monthly Job Gains (millions)
Consumer Price Index (CPI)
Retail Sales report