Job Gains Exceed Expectations

The big event last week was Friday's Employment report. The labor market data came in stronger than expected, which was great news for the economy, but it caused mortgage rates to end the week higher.

Against a consensus forecast of 160K, the economy added 195K jobs in June, and upward revisions to the figures from prior months added another 70K. The Unemployment Rate remained at 7.6%. Average Hourly Earnings, a proxy for wage growth, showed the strongest growth in about five years. In short, this report exceeded expectations in nearly every area, which was a double blow for mortgage rates. Stronger labor market data increases future inflation expectations and it brings forward the expected timing for the Fed to begin to scale back its bond purchases.

While the primary influence on mortgage rates likely will continue to be expectations for Fed policy, a wide range of global events caught the attention of investors last week. China's central bank unexpectedly tightened monetary policy to try to rein in bank lending. This comes at a time when recent economic data from China has reflected slower economic growth. The strength of the world's second largest economy plays a major role in the performance of many other countries. In addition, the Portuguese government is having difficulty generating support for its austerity program, calling into question the political will to institute reforms in other European countries. Finally, protests and violence in Egypt increased in scale. Uncertainty in China, Europe, and the Middle East adds to the already high levels of volatility seen in mortgage markets recently.