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Strong Wage Growth

Overview: With a schedule packed full of major economic data, it was a volatile week for mortgage markets. The primary influences were mostly offsetting, however, and rates ended just a little lower.


The Personal Consumption Expenditures (PCE) Price Index is the Federal Reserve’s preferred inflation measure because it adjusts for changes in consumer preferences over time. In October, core PCE was up 5% from a year ago, slightly below expectations, and down from a peak of 5.4% in February. However, this remains far above the Fed's target level of 2%, meaning that additional monetary policy tightening will continue.

While the latest inflation report surprised modestly to the downside, stronger than expected job gains and wage growth increased concerns about future inflationary pressures. The economy gained 263,000 jobs in November, above the consensus forecast of 200,000. The best performing sectors were leisure, hospitality, and healthcare. Average hourly earnings, an indicator of wage growth, were 5.1% higher than a year ago, far above the consensus forecast for a decline to an annual rate of 4.6%. Strong wage gains have helped offset the impact of higher prices. Two other significant economic reports released this week from the Institute of Supply Management (ISM) highlighted the divergent trends in the economy between purchases of services and goods. The ISM Services Index rose to 56.5, which was well above expectations. By contrast, the ISM Manufacturing Index dropped to 49, which was below the consensus forecast and the lowest level since May 2020. Readings above 50 indicate that the sector is expanding, and readings below 50 indicate it is contracting. Stuck at home during the pandemic, consumers heavily favored the purchase of goods, but not surprisingly, the pendulum swung back in the other direction as the economy reopened.


Job Gains (thousands)


Week Ahead

Looking ahead, there are two very important economic events coming up. First, the key Consumer Price Index (CPI) report will be released on Tuesday. CPI is a widely followed monthly inflation indicator that looks at the price changes for a broad range of goods and services. Following that, the next Fed meeting will take place on Wednesday. A 50 basis-point rate hike is expected, and investors will listen closely for hints from Fed officials on the pace of future rate hikes and bond portfolio reduction.


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