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Interest rates were remarkably quiet in the last week of March. Markets were in the process of shifting focus back to economic data from the banking sector. It just so happened that last week was light in terms of data. This week was quite the opposite.
The first week of any month often brings many of the most meaningful monthly economic releases. These include the Institute for Supply Management (ISM) reports and, most notably, the Employment Situation (commonly referred to as the “jobs report”).
Virtually all economic data coming in the first 3 days of the week were good for bonds/rates. In other words, the data was weaker than expected. Bonds benefit from weaker data because a slowing economy is less able to keep up with growth and inflation — the two main pillars of interest rates.
As expected, bonds were eager to get some actionable economic updates and rates wasted no time responding to the downbeat news from the ISM. There are two flavors of the ISM Purchasing Managers’ Index (PMI). Each can be considered as a broad barometer for growth in the respective sector where anything over 50 is good/growing and anything under 50 indicates contraction.
Rounding out the rate-friendly news in the first half of the week, the Job Opening and Labor Turnover Survey (JOLTS) showed very few job openings in the month of February. The number is still very high overall, but markets are looking for a trend opposite to a similar level. In conjunction with the ISM data, JOLTS added to the sense that resilient economic momentum is waning.
But JOLTS was not the market’s first choice of labor market indicators for the week. The big jobs report is in a different league. In this case there was really little else to say. Employment generation was in line with expectations. Wage growth remained solid. Unemployment fell to 3.5%, and the labor force grew to its largest level since March 2020. It would be hard to make a strong case for labor market weakness when the unemployment rate chart looks like this:
The bond market agreed and quickly reflected on some of its progress in light of the previous week’s data. To be fair, traders already thought that much progress had been made by Wednesday morning, based on the momentum of the way lower rates dried up by mid-Wednesday.
The reversal was even more pronounced for Fed rate hike expectations. At one point, the market had completely written off the prospect that the Fed would raise rates again this year. But after the jobs report, expectations returned to the same level from the beginning of the week.
Mortgage rates almost always follow the rest of the bond market, even though the ratios can vary. The average borrower made it to 30-year fixed rates on Thursday, the lowest since early February, but then bounced higher on Friday along with the rest of the bond market. On a bright note, the jump in mortgage rates was not nearly as large as it was for other parts of the bond market.
In the bigger picture, top-tier rates are consolidating in a range roughly between 6 and 7 percent. This is indicative of a wider debate for the entire bond market. Whether it is 6-7% in mortgages or 3.3-3.8% in 10yr Treasury yield, markets await clarity on growth and inflation. If this week’s data was worth only a small amount of volatility in that broad range, it’s not hard to imagine that we’d need a few months of consistent messaging from other economic data to settle the debate.
Still, some voices are louder than others when it comes to this particular debate and we’ll hear one of the loudest voices next week. The Consumer Price Index (CPI) will be released on Wednesday morning. Another report with as much street cred as today’s big jobs report is the CPI. If it shows that core inflation is heating up more than expected for March, there will be pressure on rates to return to the current range. But if inflation looks like it’s shifting into a quieter gear, rates may need no more convincing before attempting to break below that range.
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