Jobs Market Strong! Rates Heading Higher

Posted by urbandigs

Thu May 17th, 2007 09:48 AM

A: Wow, this certainly was a surprising jobs report! Jobless Claims fell to the lowest level in 4 months, surprising wall street analysts. The yield on the 10YR surged to 4.74% from 4.7% on this report which will certainly have an effect on lending rates in the near term. Expect mortgage rates to trickle higher as longs as the US economy remains strong.

According to Yahoo Finance:

Newly laid off workers filing applications for unemployment benefits fell last week for a fifth consecutive time, pushing jobless claims to the lowest level in four months.

The unexpected drop caught analysts by surprise. They have been expecting claims to begin rising as a result of the economic slowdown triggered by a steep slump in the housing industry.

While businesses so far have resisted laying off workers, many economists still believe the unemployment rate will start rising in coming months, climbing to perhaps as high as 5 percent by the end of the year.
The biggest increase in layoffs appears to be in the auto sector as layoffs in the construction industry lags what most economists were expecting at this time of the year. In simple words, the steep slump in the nation wide housing market has not yet resulted in the number of layoffs economists would expect. Time will tell if this ever happens, but I think it will towards the end of 2007 bringing the jobless claims data higher.

So what do we have here?

Corporate Profits at record highs. The US Dollar near record lows vs. other currencies. A US GDP # that was the lowest in four years. Unemployment rate near a 6 year low. Stocks at record highs. Housing nation wide in a deep slump. Here are some charts:





So, does anyone have any idea what the heck is going on? I certainly don't. I knew inflation was a concern and continues to be a concern which made me believe rates need to go higher; and according to todays bond market reaction, they will. This latest jobs number will certainly help to keep rates steady. There was even a discussion over at The Big Picture recently about how the government measures of inflation are UNDER-REPORTING inflation over the past 8 years. Here is what Barry Ritholtz discussed:

In his post titled, "Want To Measure Actual Inflation: See The Core/Headline CPI Spread":
Whenever I hear the phrase "excluding volatile food and energy" I just laugh. Can a pricing group be considered volatile if it merely goes up each month in an orderly fashion -- for years and years?

That's not volatility, thats a trend.

One way to actually measure how absurd the US core inflation measure is to look at what has happened to the spread between headline CPI and Core CPI. If Core CPI is understating inflation, than the spread should be widening. If it is accurate, the overall ratio between the two should be relatively steady.

What does the data show? The spread has increased substantially since the US adopted an ultra low rate/easy money policy under Greenspan.

This simply reflects the government's BLS inflation data diverging from reality.
Very very interesting. Headline CPI includes the very volatile food and energy data in its measure of inflation. Core CPI excludes food and energy due to its volatile nature to get a different measure of actual inflation. Barry points out that the spread between these 2 numbers have been widening proving the disconnect and the errors contained in these measurements. His conclusion is..."But the bottom line is that the US measures of Inflation, especially the core levels, are constructed to diverge from reality, and understate price rises. That is seen in the headline CPI/Core spread."

If this is true, then we have some trouble ahead! Now I know I got into some stuff here that most of you don't like to see me get into, but I feel its important. The real purpose of this post was to discuss the latest batch of economic data showing a STILL very strong jobs market. This is making yields on the 10YR surge which will ultimately have a tug effect on mortgage rates in the coming week!

EXPECT rates to trickle higher (read my post "Why Rates Are Going Higher" for more info on the 10YR and mortage rates). For all of you with recently signed contracts of sale, don't risk it. LOCK IN YOUR RATE NOW or hope that a future economic report will show a weakening US economy and help drag down rates again.