Economic Commentary July 13th

Labor Market Surprise

Following the British vote on June 23 to exit the European Union, mortgage rates have declined significantly. Over the past couple of days, however, there has been a small reversal, and mortgage rates ended the week a little higher.

Strength seen in the June Employment report released on Friday may have been the trigger for the reversal. While there was little reaction to the report on the day it was released, its impact was seen early this week. After falling sharply, to record lows in some cases, long-term yields in the U.S. reached the point where there was less demand from investors. The very weak results seen at Tuesday’s 10-year Treasury auction showed this to be true. The drop in demand was understandable considering what the Employment report said about the strength of the U.S. economy. Although U.S. yields have risen a little, including mortgage rates, they remain near multi-year lows.

The strength seen in the June Employment report was undeniable. It curtailed the concerns of economic weakness that arose following the release of the disappointing data for May. The May Employment report showed that the economy added just 11,000 jobs, which was the lowest level since September 2010. Investors expected a rebound in June with the consensus for a gain of 180,000 jobs. In fact, the economy added a massive 287,000 jobs in June. The other components of the report also reflected strength in the labor market. More people entered the workforce, which is a sign of confidence in the ability to find a job. It did cause the unemployment rate to rise from 4.7% to 4.9%, but it rose for a good reason. In addition, wage growth rose at the fastest annual rate since July 2009.

Looking ahead, Friday will be packed with data, including reports on retail sales, CPI, industrial production and consumer sentiment. Consumer spending accounts for about 70% of economic output in the U.S., and the retail sales data is a key indicator. The Consumer Price Index (CPI) is a widely followed monthly inflation report which looks at the price change for goods and services which are sold to consumers. After that, the report on housing starts will be released on July 19, and the existing home sales data will come out on July 21.

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