Phil Grossfield's Blog

A LITTLE EXTRA…

Weak Jobs Report – Bonds Up! Taper in 2013 Unlikely

jobsreportMy Market Watch:   Weak Jobs Report!

The weak Jobs Report this morning will benefit us for the remainder of 2013.  First, for now rates/pricing have improved across the board, meaning both Fixed and Arm coupons. Second, and more importantly, there is a strong likelihood that any discussion of QE tapering will be pushed into 2014.

The Jobs Report came in at 148,000 new jobs when it was expected at 180,000 new jobs. Now, if you think like a trader on Wall Street then this news makes you uneasy about the stock market. Why? jobsreport2Because new jobs reported is an indicator of economic strength. That makes sense, right? More new jobs means things are generally better…the economy is booming. But the opposite is also true…less new jobs means a weaker economy, and this morning’s report was 31,000 less new jobs than expected…ouch! So, traders feel the economy is weaker than expected, and therefore they’d rather put their money elsewhere, like into the bond market. When traders invest in bonds, our pricing is directly affected in a positive way. This morning bond pricing jumped +40bps. This improved rates significantly across the board.

fedreserveMore importantly, the discussion of QE Tapering is likely pushed into 2014. Why? Because the Fed’s argument for tapering QE is based on the strength of the economy. That is, if the economy is improved, then it can withstand QE tapering.  If you recall, Quantitative Easing is the government’s monetary policy of spending billions on bonds in order to keep interest rates low and stimulate the economy. As long as bonds are being bought the price of bonds remains low and this has kept our mortgage rates low for a long long time, thank you very much! Many have argued the government is way overdue to back off QE or taper QE…meaning stop buying so many bonds. If the government tapers QE, bond prices will increase and rates with it. In fact, the mere discussion of QE tapering influences traders to sell off bonds since low rates would no longer be expected. c31But now we have no reason to believe QE tapering is an immediate threat. Not too long ago weak economic data pushed QE tapering to the side and then the government shut down. Now the economic reports indicate a weak economy pushing the possibility of QE tapering even lower. And, we have a new Fed Chairman coming in…and she is not a fan of QE tapering. For these reasons, I think we can expect low rates for the remainder of the year.

Looking at today, I see the bond has pushed through an important ceiling of resistance and this is a very good thing. If the bond can continue to trade above this ceiling, then naturally it turns into a floor of support. We want that to happen as much as we want the Minnesota Vikings to win…and everyone wants that!


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