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  • Writer's pictureMark Taylor

Market Update 7.07.2023

Unanticipated Labor Market Strength Sends Mortgage Rates Skyward



7/07/2023 Market Summary - Mark Taylor


In a surprising turn of events, the American labor market defied forecasts, exhibiting an unexpected surge in strength that has triggered a sharp increase in mortgage rates. This development occurred in the wake of new data from ADP (Automatic Data Processing, Inc.) and the U.S. Department of Labor, causing an accelerated upswing in yields.


The ADP report, an influential precursor to the non-farm payroll (NFP) data, revealed a massive increase in employment, far outpacing economists' predictions. The report showed that private-sector employment grew by an astounding 497k in June, compared to a conservative forecast of 228k. The ADP data, which measures the same scale as the authoritative NFP (count of new payrolls), has had a tangible impact on the financial markets, particularly the bond market.


In conjunction with the ADP figures, the Challenger Job Cuts report disclosed a significantly reduced figure of 40.709k job cuts, contrasting starkly with the previous 80.809k. This is the lowest reading in eight months and indicates a robust job market rather than the "ongoing labor market softening" that the Federal Reserve anticipated.


Meanwhile, jobless claims numbers released by the Department of Labor came in slightly higher than forecast at 248k, versus a predicted 245k, and a previous count of 239k. Despite the small rise, the figure remains relatively low, supporting the narrative of a tightening labor market.


In response to this potent combination of job market indicators, the bond market reacted strongly, with the yield on the 10-year Treasury note – a key benchmark for mortgage rates – surging a brisk 10 basis points to 4.035%. Mortgage-backed securities (MBS) also reacted to the news, slipping just over three-quarters of a point, although these movements were slightly skewed due to liquidity issues.


The economic implications of the data are far-reaching. As yields surge, so too do mortgage rates, making home loans more expensive for potential buyers and homeowners looking to refinance. This poses challenges for the housing market, which has been grappling with affordability issues amidst record-breaking home prices.


While the strong labor market data may be welcomed as a positive sign for the economy's resilience, the sudden rise in mortgage rates serves as a reminder of the intricate balancing act central banks face. In this case, the Federal Reserve's expectation of only two more rate hikes this year could be put to the test if labor market strength persists.


In the final analysis, while the robust labor market is a positive sign of economic health, it has triggered an unexpected mortgage rate surge that could potentially put a damper on the housing market's trajectory. Market participants will now be keeping a close eye on the Federal Reserve's response to these unanticipated labor market developments.








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