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April’s jobs report returned mixed results to investors on Friday, as the unemployment rate fell to 3.9 percent, an 18-year low. However, the number of jobs created, about 164,000, was shy of expectations. The labor force participation rate also decreased.

The results were met with an initial drop in equity prices and bond yields in early trading on Friday. Investors had hoped to see a bounce-back month in April after the March jobs report disappointed. Economists surveyed by Reuters had expected payroll growth of 192,000 jobs, according to CNBC.

Employment is now at near full capacity, a good sign for economic health. However, slow wage growth and the declining labor force participation rate are concerning and keep a lid on more rapid economic growth. Average hourly earnings increased just 4 cents, a 2.6 percent annual growth rate, and short of expectations on Wall Street. In addition, the number of people counted as out of the labor force swelled by 410,000 in April to 95.7 million, a concerning number.

An encouraging footnote: A broader measure of unemployment that includes discouraged workers and those holding part-time positions for economic reasons fell to 7.8 percent, the lowest since July 2001.

Fed holds on rate hikes

Earlier in the week, as expected, the Federal Reserve Open Market Committee chose to keep its target rate in the 1.5-1.75 percent range. Few analysts expected any different. After raising rates in March, most Fed watchers have pegged June as the next likely time Fed officials could increase its rate.

Analysts noted the FOMC did change the language in its post-meeting public statement. The Fed recognized both headline and core inflation measures has “moved close to 2 percent.” Goldman Sachs analysts noted Fed governors in public statements of late have moved away from dovish tones to more moderate stances.

This slight shift is further indication that Fed officials will likely take steps to keep interest rates on a gradual increase. The reason? After unprecedented stimulus for years following the 2008 financial crisis, the Fed’s inflated balance sheet now must be wound down and interest rates increased in order to guard against runaway inflation in a growing economy. That is accomplished when rates rise.

While economic growth and inflation isn’t yet overheated, inflation readings have moved in line with the Fed’s target of a 2 percent annual rate. That, combined with low unemployment and a growing economy, are all indications of rising inflation pressures.

Analysts now peg the odds of a June hike at 90 percent. Two more increases later this year are also likely.

Mortgage rates, which tend to follow the trend of the 10 Year US Treasury yield, held mostly steady this week, buoyed by the Fed’s non-action and the softer-than-predicted jobs report. The 10Y Treasury yield retreated to 2.91, the lowest level since April 20 post jobs report. It currently is trading at 2.94 percent. Continue to watch a push to north of 3 percent in the coming days and weeks as the market will digest a new months worth of economic data.

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About the Author:

Greg Richardson - Senior Advisor of Capital Markets & Strategy

Greg Richardson is Movement's Senior Advisor of Capital Markets & Strategy and a contributing author to the Movement Blog. His weekly market update is a must-read commentary on financial markets, the mortgage industry and interest rates. Greg is an industry veteran who knows how to read the financial tea leaves and make complex industry data easy for loan officers, real estate agents and homebuyers to understand.