MBS prices today are 50 basis points worse than yesterday morning based upon this morning’s Non-Farm Payrolls report coming out materially higher than the markets had predicted at 254,000 new jobs in September. Also, monthly wage increases came out higher than expected at an annual rate of 4.00% and the prior monthly jobs and wage reports were also both revised higher today. Finally, the Unemployment number came out lower than expected at 4.1%.
These reports show that the economy is more resilient than previously estimated and this reduces pressure on the Fed to do large rate cuts in order to stave off a “hard landing” economic recession. After today’s reports came out, the Fed Futures market is predicting a zero percent probability of a 50 basis point Fed cut in their next meeting in November, and a 97 percent probability of a 25 basis point cut. Only as of last week the markets were predicting about a 50% probability of a 50 basis point cut in November. As a result of these reports, MBS prices sold off by about 50 basis points in price this morning and the yield on the 10-year Treasury spiked up to almost 3.98 percent. As of this writing, the yield is 3.954 percent. Below is the graph of the yield on the 10-year Treasury over the last five trading days.
Non-Farm Payrolls Report. The September report was predicted to be 140,000 new jobs which would have been just a little lower than August’s 142,000 number. When it came out this morning at 254,000 for September, this was materially above the market’s predictions for a slowing labor market. This was the highest monthly level in six months and the prior August report was also upwardly revised from 142,000 to 159,000 today. The 12-month average has been 203,000 so today’s report indicates a warming jobs market, rather than the cooling jobs market that had been predicted.
Inside the headlines for the Non-Farm Payrolls report for September, government hiring was 31,000 and the prior August report’s government hiring was upwardly revised to 45,000. Most of the September government hiring was state and local government hiring. Of the 31,000 total government jobs hired in September, 27,000 were “social assistance” payrolls, meaning the people hired are providing medical or social assistance to people. Bar and restaurant hiring was the largest category of increases in private payrolls in September with 69,000 new jobs hired. The healthcare sector added 45,000 new jobs in September. Construction jobs increased by 25,000 in the month.
Average Earnings. Average Earnings increased by 0.4% in the month of September, flat to August’s 0.4%. The annual rate of Average Earnings was 4.0% as of September, up from 3.8% the prior month. The markets had predicted average earnings would have decreased to a 0.3% monthly increase in September, and the annual rate would have remained flat at 3.8%, so today’s reports surprised the markets.
Unemployment Rate. The markets had predicted a 4.2% rate for September, which would have been flat to August’s report of 4.2%. The drop to 4.1% was the opposite direction the markets were expecting.
Impact to the Fed. One of the Fed’s top worries has been that a strong labor market would push up wages, and these higher wages paid by businesses, would be passed onto customers in the form of higher prices, thus pushing up inflation pressures. After today’s reports were released, the market’s debate as whether the Fed should do a 25 versus a 50 basis point rate cut in November basically ended, and after these reports came out, the Fed Futures market is now predicting only a 25 basis point cut in November, with another 25 basis point cut December, and the same 25 basis point cuts for January and March of next year.
Impact to the MBS Market. Four reports that were released this morning caused the MBS market to sell off. They were the materially higher Non-Farm Payrolls of 254,000 for September, the upward revision of the August Non-Farm Payrolls report to 159,000, the surprise increase in annual Average Earnings from 3.8% to 4.0%, and the surprise decline in the Unemployment Rate to 4.1% in September, down from August’s 4.2%.
Prior to these four reports being released this morning, the MBS markets had been pricing an expected future economic scenario of declining monthly Non-Farm Payrolls reports, declining monthly Average Earnings increases, and a rising Unemployment Rate. This would have led to a slowing of the U.S. economy and a possible recession next year. The key debate in the markets was how fast the economy would be slowing down and would we have a “soft landing” scenario with only a slight increase in Unemployment rates, or a “hard landing” scenario where Unemployment Rates would spike up?
These four key reports this morning were all completely opposite of the scenario that the MBS markets had been pricing, and as a result the MBS market adjusted prices this morning to reflect a new potential future scenario where the economy may not even have a recession and inflation pressures could remain higher for longer.
This Market Update and similar such communications are for informational purposes only and are based on publicly available information. These materials are general communications, which are not impartial, and are provided solely for discussion purposes, and not in connection with any product or service offering. The opinions and views expressed in this Market Update are as of the date of this communication and are subject to change. Any forward-looking views and statements contained in this Market Update are based on current estimates or expectations of future events or results. Actual results may differ materially from those described in this Market Update. The views expressed in this communication should not be attributed to Guild Mortgage Company as a whole and may not be reflected in the strategies and products offered by Guild Mortgage Company.
