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Investors received more rosy economic news Friday morning when the April jobs report beat expectations. The results included a 50-year low for unemployment, even as the Federal Reserve chooses to keep interest rates unchanged.

The employment report surprised analysts with a net 263,000 new jobs created last month, beating projections of 190,000. The national unemployment rate is now at 3.6 percent, its lowest mark since 1969.

Wage growth held steady at 3.2% over the past year, according to the monthly report, just below expectations. Professional and business services led job creation with 76,000 new jobs. Construction added 33,000 jobs, its 12-month total to more than 256,000 new jobs. Health care rose by 27,000, bringing its 12-month total to 404,000, and financial positions increased by 12,000, rounding out an increase of 111,000 over the last 12 months.

One less-impressive number remains the labor force participation rate. It dropped to 62.8% in April, as more people were added to the group of Americans who are not considered unemployed, but rather have left the labor force altogether.

Earlier in the week, we learned private payrolls grew by 275,000 in April, its biggest jump since last July, according to ADP and Moody’s Analytics. The report shows that medium-sized businesses proved to be the industry leaders in job growth with small business just behind. However, as Moody’s chief economist Mark Zandi points out, “April’s job gains overstate the economy’s strength, but they make the case that expansion continues on.”

Overall, economists viewed April’s report as proof the economy continues to grow and add jobs. This period of economic expansion will become the longest in U.S. history if growth continues for several more months.

The markets continue to take all of this information in stride with rates modestly higher from the yearly lows a few short weeks ago and equities are approaching record highs yet again. The 10 Year Treasury note is currently trading at 2.55 percent which is near the top of the near-term range. (Chart below)

Meanwhile, Trump Administration has pressured central bankers to lower interest rates, giving even more fuel to an economy many thought would begin to lose steam by now.

However, the Federal Reserve rebuffed President Trump’s requests to lower rates as the Federal Open Market Committee members voted to leave interest rates unchanged.

In his press conference Wednesday afternoon, Federal Reserve Chairman Jerome Powell said, “Overall the economy continues on a healthy path, and the committee believes that the current stance of policy is appropriate.”

Inflation, or lack thereof, is the concern for some analysts as core inflation went up by just 1.6% in March, down from 1.8% in January as the benchmark 2% in December. Powell described this low inflation as “transitory,” not persistent, which was a big reason behind leaving rates unchanged. He added that if the low inflation proved to be more persistent, that would make a case for changing rates.

Chris Rupkey, chief economist at MUFG in New York, agrees with Powell’s approach. “Inflation really isn’t an issue right now, it looks like the outlook for growth is strengthening. At this stage, the Fed can stay on the sidelines and rate cuts at this juncture are premature.”

The one change that the Fed did make was to change the interest rate paid on excess reserves that banks keep at the Fed. That rate was lowered by 0.05 percentage points to 2.35%.

Trade talks potentially wrapping up

White House Chief of Staff Mick Mulvaney says that we should get an idea in the next two weeks of whether or not the United States can reach a trade deal with China. Mulvaney added that there would not be a deal unless it was a “great” one for the U.S.

Meanwhile, President Trump is still pushing for an amended North American Free Trade Agreement. The United States-Canada-Mexico Agreement has not been ratified by Congress, and Mulvaney says he doubts that House Speaker Nancy Pelosi will allow it to be presented for a vote on the House floor.

Senate Finance Committee Chairman Chuck Grassley called out President Trump in an op-ed earlier this week saying that Trump’s tariffs on steel and aluminum are a “significant roadblock” to passing the USMCA.

In his article, Grassley cited U.S. Trade Representative Robert Lighthizer’s statement earlier this year that said “failing to pass USMCA this year would damage the credibility of America’s global trade agenda, particularly the efforts to secure a deal with China.”

Freddie Mac ups the forecast as pending home sales rebound

Economists with Freddie Mac have revised up their originations forecast for 2019 from $1.67 trillion to $1.74 trillion. They also changed the 2020 forecast and revised it up to $1.7 trillion. They cite lower interest rates as the catalyst for the change, predicting more refinancing driving the market.

In a press release, Freddie Mac Chief Economist Sam Khater said “We expect to see the result of these low mortgage rates and stronger wage growth translate into better home sales in the coming months, along with better-than-expected refinance activity for the year.”

We saw a rebound in March’s pending home sales with an increase of 3.8%, an eight-month high according to the National Association of Realtors. Analysts had expected to see that number rise, but by a much more modest amount. Remember the pending home sales data tracks contract signings, not closings, so this is an indicator of existing home sales data one to two months down the road.

The frustration for first-time homebuyers may continue, however, even with the sharp downturn in home price growth. Nationally, the S&P Case-Shiller index shows home prices rose by 4% in February 2019 compared to February in 2018. The 20-city composite index rose by just 3% year-over-year. That is the slowest pace of annual price growth in nearly seven years.

Khater believes that this slowing price growth is good overall for buyers, but “Unfortunately, first-time homebuyers will likely not realize as much of the benefit with such high demand and price growth for lower-priced homes.”

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Movement Staff

The Market Update is a weekly commentary compiled by a group of Movement Mortgage capital markets analysts with decades of combined expertise in the financial field. Movement's staff helps take complicated economic topics and turn them into a useful, easy to understand analysis to help you make the best decisions for your financial future.