Recent Employment Report Positive for Mortgage Rates

Wage Gains Fall Short

Friday's important Employment Report was positive for mortgage rates. The other likely market-moving event over the past week, a vote in Italy, had little impact. As a result, mortgage rates ended the week a little lower.

Investors focused on the wage component of the key Employment Report. In November, average hourly earnings were far below the consensus with a small decline from October. They were 2.5% higher than a year ago, down from the multi-year high of 2.8% last month. Slower wage growth reduces the outlook for future inflation, which was positive for mortgage rates.

There were no surprises in job gains. Against a consensus forecast of 170,000, the economy added 178,000 jobs in November. The unemployment rate declined from 4.9% to 4.6%, well below the consensus for a flat reading, and the lowest level since August 2007. However, because the decline in the unemployment rate was mostly due to workers leaving the labor force, it was not viewed as negative for mortgage rates.

On Sunday, voters in Italy voted against a referendum presented by Prime Minister Matteo Renzi, which was intended to simplify the process for passing laws. As expected, Renzi resigned in response to its defeat. It will take some time before the composition of the new government is clear. Concerns about the Italian banking sector due to the defeat have been eased by reports of a bailout. Ahead of the vote, investors had shifted to safer assets, including U.S. mortgage-backed securities (MBS). Italian markets initially weakened after the vote, but they recovered within days. Overall, investors appear to have accurately positioned for the outcome, and there was little net reaction to the vote in stock and bond markets outside of Italy.

Looking ahead, the focus will be on two highly anticipated central bank meetings. The next European Central Bank (ECB) meeting will take place on Thursday, December 8, and the next U.S. Fed meeting will be on Wednesday, December 14. While the Fed is widely anticipated to hike rates, there is a wider range of expectations for the ECB. The biggest upcoming U.S. economic data will be the report on retail sales on December 14. Consumer spending accounts for about 70% of economic output in the U.S., and the retail sales data is a key indicator.

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