Jobs fall short

A review of the week in home loan finance from MGM Mortgage, Cedar City, Iron County, Utah

There were two big economic events scheduled this week, and they both produced large reactions in mortgage rates, but in opposite directions. A new aid program in Europe caused mortgage rates to increase, while weaker than expected Employment data resulted in a substantial improvement in rates. The net effect was a modest decline in mortgage rates for the week.

On Thursday, the European Central Bank (ECB) announced a new program to purchase short-term bonds of troubled countries. Of note, the new program will be "unlimited" in size, and there will be conditions attached for countries which receive aid. Investors were more willing to own riskier assets after the news, which helped stocks and hurt most bonds, including US mortgage-backed securities (MBS).

Friday's release of the Employment report caused a swift improvement in mortgage rates, however. Against a consensus forecast of 130K, the economy added just 96K jobs in August, and the data from prior months was revised lower by 41K. The Unemployment Rate unexpectedly dropped to 8.1% from 8.3% last month, but this was also seen as a sign of weakness given its cause. The decline was due to people leaving the labor force rather than people getting jobs. In short, it was difficult to find any positive news in the report. As a result, investors raised their expectations for quantitative easing (QE3) from the Fed, possibly as soon as the FOMC meeting next Thursday. QE3 would likely involve Fed purchases of mortgage-backed securities (MBS), so mortgage rates improved following the news.