Market Update:
Two bombshell economic reports over the last few days have given the market a fresh perspective on the state of both the labor market and inflation. The party started on Tuesday with a two-month Employment Report. This report truly had a bit for everybody: October job losses were greater than expected, November job gains were better than expected, unemployment ticked higher (though notably only because more people re-entered the workforce), and wage inflation saw a meaningful decline, falling to 0.1%. Cases for both a softening labor force and a resilient labor force could be made from this report, and the shadow of potentially sloppy data due to the government shutdown loomed large when the market digested the report overall.
Not to be outshined, fresh CPI (inflation) data delivered quite a shock this morning. Year-over-year inflation was expected to land in the 3.0%–3.1% range but instead came in at 2.7%. WHAT?! On top of that, core inflation dropped to 2.6%! At face value, one might expect the bond market to be delivering early Christmas presents on our rate sheets today, but unfortunately (at least in the first few hours) that has not yet been the case. It appears the bond market is treating this report with skepticism, likely due to concerns surrounding the government shutdown and the reliability of the underlying data. It almost feels too good to be true.
Last but not least, the temperature in Washington appears to be heating up again, as the potential expiration of Obamacare subsidies is now only weeks away. As a result, the likelihood of another government shutdown in January continues to increase, which does not bode well for the reliability of economic data in the coming months for both the market and the Fed. Add in renewed oil-price uncertainty stemming from the blockade announcement involving Venezuelan oil tankers (not good for inflation), and the bond market appears to be heading into year-end with extreme caution.
Bottom line: today’s lower inflation data is welcome news, and hopefully over the next few months additional inflation reports can validate today’s outcome and provide mortgage rates with some tailwinds heading into the spring market.
