1/8/24 REcap: Rates Inched up to Start 2024

Rates ended their huge run of week-over-week declines by inching up modestly. After a streak of rates either falling or staying flat since October 25th, we were bound to have a bad week, and this one wasn't even that bad! The Christmas season was good for the labor market as nearly all the reporting showed that the labor market isn't letting up. The average 30-year fixed rate conventional loan ended the week at 6.7% (up from 6.56% the week prior)! 
 
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Last week was a big week of employment data. It kicked off with US Job Openings report. This was the best piece of news of the week for anyone hoping for lower rates. Openings fell to a fresh 2-year low, 8.79 million, which is roughly in line with market expectations of 8.8 million. In another sign of a cooling labor market, the report also showed that the number of hires fell by 363,000 in November to 5.47 million. That’s the lowest level since April 2020 when the Covid-19 pandemic first upended the US economy. Market analysts declared this data to be good, but not great as we're way below peak job openings and hires post-pandemic, however still above pre-pandemic levels.

Next, the ADP employment report showed that private payrolls increased by 164,000 jobs last month! Wayyyy above the market expectation of 130,000. Leisure and hospitality led the way by adding 59,000 of the 164,000 figure. Many are quick (and hopeful) to point out that this may be temporary due to the holiday season, and it may be. The bright spot was that the pace of earnings growth decelerated again, with those staying in their job seeing annual pay increases of 5.4%, however still quite high. The faster we see wage growth decelerate the better for inflation concerns.

Finally, the most important one - the US employment report - came in on Friday and that really affected the market. Every line item - unemployment rate, new jobs, hourly rate - came in BETTER than expected! US unemployment rate is now sitting at 3.7% (expectation was 3.8%), 216,000 jobs were added (expectation was 170,000) and average hourly earnings rose 0.4% on the month and were up 4.1% from a year ago, both higher than the respective estimates for 0.3% and 3.9%. The data regarding jobs added differs from the private payroll data received from ADP because ADP and the Labor Department have different methodologies for calculating the increase. However you look at it, one thing is certain, the labor market is hotter than we thought.

Why is a hotter than expected labor market BAD for interest rates? Because the Federal Reserve (and most economists) agree that a tight labor market means higher wages for employees as employers fight to hire a small pool of individuals for a large pool of jobs. Higher wages = more spending power = more demand for products = inflation!

Richmond Federal Reserve President Thomas Barkin said on Wednesday, January 3rd (before the release of the US employment report) that the economy is on its way to a soft landing, but  “the potential for additional rate hikes remains on the table”, which isn't unexpected because taking rate hikes off the table would cause the market to go crazy.

However, after the US employment report was released, Barkin said, "getting inflation under control is critically important and at this point we are still at 3.7% unemployment and 216,000 jobs added. We're still at a point where inflation is over our target and unemployment is arguably at or below," levels consistent with maximum employment. Now, Barkin also said “I don’t have any objection conceptually to toggling rates back toward normal levels as you build increasing conviction and confidence that inflation is on a convincing path back to your target,” but that can't happen if the labor market doesn't cool a bit.