Three Things to Know: What do Unemployment Reports Have to do With Mortgage Rates?
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By Ryan Casey Stephens, FPQP®
Special Contributor
Each week in December we’ll take a deep dive into one report that moves markets and impacts mortgage rates.
Lower unemployment claims mean more people are employed, doesn’t it? And isn’t it true that a higher rate of employed Americans means we have a healthier economy? What do unemployment benefits have to do with mortgage rates?
Initial Jobless Claims and Continuing Claims are reports, updated weekly, that have a tremendous impact on markets. And while these reports may seem self-explanatory on the surface, there’s more you should know. Let’s dive into the details in this week’s Three Things to Know.
Two Categories of Unemployment Data
We generally refer to this report as ‘Initial Claims’ in short form but it’s two metrics in one. Initial Jobless Claims measures individuals filing for unemployment for the first time, measuring the week prior to the release of the data. In the most technical sense, it doesn’t measure true unemployment as reported by employers, rather it records only those folks who file for unemployment. Americans who are terminated for cause or who choose to leave their jobs aren’t included in the metrics.
Continuing Claims make up the second half of the data and measure the number of individuals who previously filed for unemployment and continue to receive those benefits. This data set is distinct because it lags one extra week behind Initial Claims, so it’s generally not as closely watched as its counterpart.
The Importance of Unemployment Data in The Market
Weekly Initial Claims data is considered an important forecast of the future health of the economy. Economists call it a leading indicator, which simply means we use the data in it to point to things to come rather than employing it to examine the past.
Reading the tea leaves isn’t always simple. Here’s an example: Recent initial jobless claims have been historically low, and are positively interpreted as low unemployment. However, our nation’s manufacturing output has slowed, and GDP has struggled. Considering Initial Claims in the bigger context has led many experts to conclude that our economy has become inefficient. We might be witnessing a time when it takes more employed people to produce the same or even fewer goods, and that doesn’t bode well for the road ahead.
What’s This Got to do With Home Loans?
When I say Initial Claims can be a market-mover each week, I’m not just referring to the stock market. Mortgage bonds, which generally determine the rate on conventional loans, are forever locked into Wall Street’s intricate and complicated dance. Let’s wrap this up using another tangible example to demonstrate why this report matter to lenders …
Because of the Fed’s hefty hikes this year, we expect to begin seeing more negative economic data soon. The Fed’s current policy is essentially constricting the flow of money and making it harder to do business or expand. One expectation is that companies will begin layoffs this winter to prepare for the recession.
If we continue to see historically low Initial Claims, it might be interpreted that the Fed’s power to throttle business is weakening. Faith in the Fed’s ability to control inflation will suffer. Since bonds suffer under inflation, mortgage bonds would lose support, and we’d see an increase in conventional mortgage rates.
Ryan Casey Stephens FPQP® is a mortgage banker with Watermark Capital. You can reach him at [email protected].
