A lack of US military action in Syria caused investors to reverse last week’s safety trade, while mixed economic data was roughly neutral. As a result, mortgage rates ended the week higher.
Since Fed officials have tied future policy changes to the performance of the economy, investors have reacted strongly to incoming economic data. Nearly all of the data released ahead of Friday’s Employment report was strong. The ISM Manufacturing and ISM Services data rose to multi-year highs. Construction Spending posted solid gains. Jobless Claims remained close to five-year lows. The Fed’s Beige Book reported that economic growth remained healthy. In short, all signs pointed to a clear path for the Fed to begin to slow the pace of its bond purchases.
The final, and biggest, piece of the puzzle broke the pattern, however. Friday’s highly anticipated Employment report fell short of expectations in nearly every area. This was bad news for the economy, but it was favorable for mortgage rates. Against a consensus forecast of 175K, the economy added 169K jobs in August, but the figures from prior months were revised lower by 74K. The Unemployment Rate unexpectedly declined from 7.4% to 7.3%, the lowest level since December 2008. Digging deeper, though, the details revealed that the decline was entirely due to people dropping out of the labor force rather than job gains. The labor force participation rate (the percentage of people able to work who are working or are looking for work) dropped to the lowest level since 1978. The Employment report caused investors to question whether the Fed will begin to taper its bond purchase program at its next meeting.
Next week, the big day will be Friday when Retail Sales, PPI, and Consumer Sentiment will be released. Retail Sales account for about 70% of economic activity. The Producer Price Index (PPI) focuses on the increase in prices of “intermediate” goods used by companies to produce finished products. Import Prices will be released on Thursday. There will be Treasury auctions on Tuesday, Wednesday, and Thursday. The highly anticipated Fed announcement will come out on September 18.
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