Market Commentary

Updated on February 3, 2012 11:34:24 AM EST EST Friday’s bond market has opened down sharply following surprisingly strong employment news. The stock markets are reacting positively to the data with the Dow up 129 points and the Nasdaq up 37 points. The bond market is currently down 30/32, which will likely push this morning’s mortgage rates higher by approximately .375 - .500 of a discount point.
OpenClose Mortgage Software

There were two economic reports posted this morning, but it is only one of them that is causing the damage. That Labor Department reported early this morning that the U.S. unemployment rate fell for the fifth straight month in January, slipping to 8.3%. This was its lowest level since February 2009. They also said that 243,000 jobs were added to the economy during the month. Analysts were expecting to see an unemployment rate of 8.5% and 155,000 new jobs, meaning the employment sector was much stronger last month by a fairly wide margin than many had thought.

This morning’s employment data is clearly negative for the bond market and mortgage rates as it shows steady strength in a sector that is believed to be preventing the broader economy from growing more. If employment is indeed gaining momentum, more significant economic growth may not be too far off, making long-term securities such as mortgage-related bonds less attractive to investors.

The Commerce Department reported late this morning that December's Factory Orders rose 1.1%. This was a bit weaker than expected, but the employment news was the focal point of the markets. In other words, this data was not important enough to draw attention from the jobs report and had no impact on this morning’s mortgage pricing.

Overall, not a pretty day for the mortgage market. It wasn’t totally unexpected though, hence the conservative short-term approach towards interest rates. On the other hand, I still think the major stock indexes are due for a pull back sooner than later. Today’s news and spike in stocks could be the catalyst I have been waiting for. Experienced stock traders tend to sell at the top of the market. If concerns about current stock prices expand, we may see more and more investors sell holdings to capture the profit from this year’s rally. That would create a slight-to-safety rally in bonds that would likely lead to lower mortgage rates. In other words, look for short-term pressure in mortgage rates, but I am more optimistic about rates for longer-term periods.

Next week is fairly light in terms of mortgage relevant economic reports and related events. There are a couple of economic releases and two fairly important Treasury auctions, but none of them are scheduled for the first part of the week. Look for stock prices and overseas news to drive trading and mortgage the first couple days of the week. We will address next week’s calendar in Sunday’s weekly preview.