In a recent podcast discussion, lead analyst Logan Mohtashami provided some much-needed clarity on the state of the bond market, mortgage rates, and what to expect as we move into an election period. Let's break down the critical points and takeaways.
1. Initial Reaction to the Jobs Report
The latest jobs report came in unexpectedly low at 12,000, but the bond market barely flinched. Initially, the 10-year Treasury yield fell but quickly rebounded to around 4.34%. Mohtashami explains that while the report looked negative on the surface, it didn't present a significant deviation from the current economic trajectory.
2. Understanding the Bond Market's Reaction
Despite the surprisingly low job creation numbers, the bond market did not show a dramatic response. This reaction—or lack thereof—can be explained by looking at the data holistically. Mohtashami pointed out that the broader economic context includes:
- GDP Growth at 3%: The economy is still expanding at a steady pace.
- Wage Growth at 4%: Although the Fed wants to see this number closer to 3%, it remains firm.
- Jobless Claims: Still relatively low at 216,000, indicating that the labor market is softening but not breaking.
The bond market responds not just to single data points but to an aggregate view of the economy. The 10-year yield hovering around 4.34% and its resistance to dipping lower signals that while the labor market is losing steam, it's not collapsing.
3. Revisions and Realities
Mohtashami highlighted that recent job data revisions have brought his long-term forecast closer to reality. He had anticipated job growth averaging between 140,000 and 165,000, and current averages now align at about 139,000 over the last 3, 6, and 12 months.
Even if we exclude factors like strikes and hurricanes that may have skewed recent numbers, the labor market's softening trend matches broader economic expectations.
4. Why Aren't Rates Dropping?
One of the most pressing questions listeners had was why mortgage rates haven't dropped despite seemingly negative job data. The answer lies in how the market perceives the economic fundamentals:
- Steady GDP Growth and Wage Increases: The economy growing at 3% and wages holding at 4% give the bond market little reason to expect significant rate cuts.
- Jobless Claims Stability: Jobless claims at 216,000 show that while hiring may be slowing, layoffs haven't surged, which would be a clear recession signal.
Mohtashami reiterated that true economic downturns are marked by rising jobless claims and a shift in the bond market's behavior—neither of which we are seeing.
5. Federal Reserve's Role and Election Uncertainty
As we approach the election, many are wondering how the bond market and the Federal Reserve will react. Mohtashami expects a 25 basis point rate cut as the Fed works toward neutral policy. The key takeaway is that these cuts are already priced into the market, so we shouldn't expect sudden rate drops unless there is a significant economic shift.
Mohtashami cautions against overreacting to potential election-related market movements. Historical trends have shown that even when elections create volatility, the bond market tends to realign with underlying economic data.
6. Potential Triggers for Change
Looking ahead, Mohtashami identifies a few areas of concern:
- Manufacturing Data: This sector has shown three consecutive months of weaker data.
- Residential Construction: With mortgage rates hovering between 6.75% and 7.5%, the housing market is under strain. Housing starts and permits have already hit recession lows, which could indicate further economic slowing if rates remain high.
7. Taking a Balanced View
The big picture, according to Mohtashami, is to think of the economy in terms of expansion or recession, not as "strong" or "weak." This mindset helps avoid ideological biases and keeps focus on the data.
Despite headlines and social media hype, the labor market, while softening, isn’t collapsing. The bond market's current behavior reflects this. If jobless claims were to rise significantly (toward the 323,000 mark on a four-week moving average), we could see the bond market and rates shift more noticeably.
Key Takeaways for Mortgage and Real Estate Professionals
- Patience is Key: With rate cuts already priced in, don't expect drastic changes immediately following routine economic data or the election.
- Monitor Jobless Claims: This metric is the critical indicator for deeper market shifts.
- Stay Informed: As Mohtashami emphasized, keeping an eye on the data as a whole will guide better decision-making for professionals and clients alike.
As we move closer to the election, uncertainties may stir short-term volatility, but Mohtashami's message is clear: keep a close eye on key data points, avoid reacting to isolated numbers, and remember that economic cycles are about expansion and contraction, not just short-term swings.
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For further details on market trends and to explore opportunities in Southwest Colorado, feel free to contact me. Let’s navigate these changing times together and find the best deals tailored to your needs.
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