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Economic Weakness Improves Rates or does it?

With few surprises in the election results, investors focused on the prospects for the economy. The outlook for economic growth moved progressively lower during the week, and Friday’s weak Employment data reinforced this view. The reports on manufacturing, construction, and factory orders released this week showed declines as well. A sluggish economy is generally consistent with reduced inflationary pressures and is favorable for mortgage rates, and rates moved lower each day from Monday through Thursday.

Friday’s mortgage market reaction to the weakerthan expected Employment report appeared to be counterintuitive, as mortgage rates rose a little after the news, offsetting some of the rate improvement seen earlier in the week. The explanation is that the jobs data was so bad that investors now expect that another economic stimulus package will be implemented soon. The government will need to issue even more debt to pay for a stimulus package, and mortgage investors pushed rates higher on Friday on concerns about the added supply of debt.

As expected, the Employment report reflected weakness in the labor market. The economy lost -240K jobs in October, and the figures for August and September were revised lower as well. This marked ten straight months of job losses in 2008, bringing the total decline in jobs to 1.18 million so far this year. The manufacturing and construction sectors continued to show weakness.


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