Rates Fall as Job Creation Slows

The job market wasn't so hot in March, and that cooled mortgage rates in the first week of April.

The benchmark 30-year fixed-rate mortgage fell 11 basis points to 6.02 percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.31 discount and origination points. One year ago, the mortgage index was 5.80 percent.

The benchmark 15-year fixed-rate mortgage fell 8 basis points to 5.59 percent. The benchmark 5/1 adjustable-rate mortgage fell 17 basis points to 5.44 percent.

Some of the decline happened April 1, when the Labor Department released the employment report for March. The news wasn't good. It showed that nonfarm payrolls grew by 110,000, well below the level needed to keep up with population growth. Economists had expected net job creation of about 220,000. The previous estimates of January and February payroll gains were revised downward by 27,000.

The slower-than-expected job growth was seen as anti-inflationary. With diminished expectations about inflation, long-term interest rates fell, including rates on mortgages.

"It seems as if it is two steps forward, one step back when it comes to job creation," says Joel Naroff, president of Naroff Economic Advisors. "We thought we had reached a point where job gains in the 200,000 or more range would be posted on a more consistent basis. Wrong again."

Another part of the drop in rates happened the day before the employment report, on March 31, when the Department of Commerce issued the statement on personal income and spending in February. It showed that personal income increased 0.3 percent and spending increased by a greater amount -- it went up 0.5 percent. People spent their increased income and then some.

This environment, with spending growth consistently outpacing income growth, is inflationary. Yet the Federal Reserve's favored measurement of inflation, the core personal consumption expenditures deflator, rose 0.2 percent in February, a slowdown from January's 0.3 percent rate. (The core PCE deflator is part of the personal income and spending report.)

With the Fed's latest short-term interest rate increase still ringing in their ears, bond investors took the slowdown in inflation as good news. Long-term rates, including those for mortgages, fell. That prepared the market for a further fall in rates the next day, when the employment report came out.

Naroff is convinced that inflation is alive and dangerous, rising at a 1.8 percent annual rate in January and February. The Federal Reserve doesn't take inflation as an idle threat, either. When the Fed raised short-term rates March 22, it explained that "pressures on inflation have picked up in recent months and pricing power is more evident."

If the Fed is correct, this drop in mortgage rates is likely to be short-lived.