Market Comment
Mortgage bond prices finished the week near unchanged, which held mortgage interest rates steady. Rates were near neutral Monday but pushed higher Tuesday morning. The trade deficit rose 41% to stand at $51B. The strength of the U.S. dollar makes imports cheaper and exports more expensive. Q1 productivity fell 1.9% as expected and unit labor costs rose 5%. The Federal Reserve is watching labor costs and the elevated reading caused rates to rise. Weekly jobless claims were 265K versus the expected 280K mark. This was not rate friendly. Unemployment stood at 5.4% and non-farm payrolls rose 223K. Traders were relieved the data was near expectations and mortgage rates fell. Mortgage interest rates finished the week better by approximately 1/8 of a discount point. LOOKING AHEAD
Wage Concerns First quarter unit labor costs rose 5%, which beat expectations for a 4.5% increase. The higher read on labor costs was not rate friendly. The data is one of the things the Fed considers in determining policy adjustments. The Fed’s last Beige Book report stated, “Districts noted modest upward pressure on wages and overall prices.”
Janet Yellen is watching inflation, especially wage inflation and job creation. The challenge she faces is balancing those concerns with other data that shows the economic recovery remains wobbly. Last week, Yellen indicated, “long-term interest rates are at very low levels and we could see a sharp jump in long-term rates” when the Fed begins its tightening cycle.
Timing is everything. Fed rate hikes aren’t expected until later in the year but mortgage rates have increased over the past few weeks as investors position themselves for the future. Be cautious in this volatile environment.
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