On Friday, June 6, the Labor Department reported that the Unemployment Rate jumped to 5.5% from last month’s reading of 5%. The 1/2 point rise was the biggest increase since February of 1986, while the unemployment rate is the highest since October of 2004. Estimates were looking for a 5% rate. Although the jump in the unemployment rate is getting a lot of attention, it should be noted that the rate was at 5.2% a month earlier. So while the change is negative, it is not as dramatic as the media is portraying.
The US lost jobs in May for a 5th month in a row as payrolls fell by 49,000 vs estimates of 60,000. The economy has lost 324,000 jobs so far this year. Overall, the job creations were better than forecast, but the big jump in the unemployment rate pushed stocks much lower and pushed mortgage rates down a bit.
MLS data for the Charleston Tri County area reports that monthly sales in May rose 5.5% from 756 units in April to 798 in May. The average sales price increased as did the average days on the market.
Fed Chairman Ben Bernanke said “the latest round of increases in energy prices has added to the upside risks to inflation and inflation expectations”. Bernanke’s speech also suggested that the Fed is in no hurry to hike rates because of “slack” in the economy which can lower inflation.
The Mortgage Market Guide could not disagree more with Mr. Bernanke. While there are risks to continued weakness in the economy, the answer is clearly not more rate cuts….it is rate hikes. The Fed should be in a BIG hurry to hike rates. They feel that the current 2% Fed Funds Rate is about 1% to 1.5% too low. Oil prices have skyrocketed since the Fed began the latest rate cutting cycle. This is because lower rates in the US weaken the Dollar. Oil is priced in Dollars, so as the Dollar weakens, oil prices climb. Last Friday, talks of rate hikes in the Eurozone sent the Euro higher and Dollar weaker, and oil spiked $5 quickly.
Should the Fed finally figure things out and hike rates, the Dollar will strengthen, oil prices will drop back towards $100, inflation will ease, and as a result….mortgage rates will decline.
The next Fed Open Market Meeting is scheduled for June 24th-25th. All eyes will be looking at what the Fed will do with rates.
Courtesy-Bank of America Mortgage