Powerful Job Growth


Overview: A couple of key economic reports were the primary influences on mortgage rates over the past week. Strong labor market data far outweighed a slightly weaker than expected inflation report, and rates ended the week higher.

 

The impressive recovery in the labor market has picked up steam over the last couple of months. The economy gained 943,000 jobs in July, above the consensus forecast of 850,000, and the results for the prior two months were revised higher. The leisure and hospitality sectors alone added about 380,000 positions, mostly in bars and restaurants. The unemployment rate declined from 5.9% to 5.4%, well below the consensus forecast of 5.7%. Average hourly earnings, an indicator of wage growth, were 4% higher than a year ago, up from an annual rate of increase of 3.7% last month.

The Consumer Price Index (CPI) is a widely followed monthly inflation report that looks at the price change for goods and services. In July, core CPI, which excludes the volatile food and energy components, rose 0.3% from May, below the consensus forecast for an increase of 0.4%. Core CPI was 4.3% higher than a year ago, down from an annual rate of increase of 4.5% last month, which was the highest level since 1991. While this was still a very high inflation rate by historical standards, investors were pleased that the pace appears to be moderating.


Federal Reserve officials have reminded investors repeatedly that the timing of monetary policy tightening will be based largely on the amount of progress toward their labor market and inflation goals, and these two influential reports provided conflicting signals. While the labor market improvement has been accelerating, inflation has declined. Complicating matters even more, officials must attempt to factor in the effects of rising COVID case counts on future economic activity. Given the high degree of uncertainty, not surprisingly, both investors and Fed officials have recently expressed a wide range of views on the economic outlook.

 

Monthly Job Gains (millions)


Week Ahead

August 13 — Import and Export Price Indexes

August 17 — Retail Sales report

August 18 — New Residential Construction report (aka Housing Starts)