Strong Job Gains

Mortgage markets continued to be volatile this week due to mixed headlines about progress to end the conflict in the Middle East. The major economic data caused little reaction, and mortgage rates ended the week slightly lower.

The conflict with Iran has been unfavorable for mortgage rates for a couple of reasons. Most significantly, oil prices have risen substantially, which greatly increases inflationary pressures. In addition, military spending has gone up, and the government may need to issue more bonds to fund the deficit. An increase in supply would cause yields to rise. However, these negative effects could be partially offset if higher energy prices lead to a reduction in global economic growth, which typically lowers the outlook for future inflation.

Looking at the other major components of the report, average hourly earnings, an indicator of wage growth, rose just 0.2% from March, below the consensus forecast for an increase of 0.3%. They were 3.6% higher than a year ago, up from an annual rate of 3.5% last month, which was the lowest level since May 2021. The unemployment rate was unchanged at 4.3%, as expected.

Two other significant economic reports from the Institute of Supply Management remained relatively strong but fell a bit short of expectations. The ISM national services sector index declined to 53.6, below the consensus forecast of 54.0, while the ISM national manufacturing sector index was flat at 52.7, below the consensus forecast of 53.0. Readings above 50 indicate an expansion in the sectors. While tariff policies have been in flux since the Supreme Court decision in February, the higher tariffs on foreign goods put in place last year may be helping domestic manufacturing companies close the performance gap over the last few years with service firms.

Looking ahead, attention will remain fixed on the conflict in the Middle East. Investors also will monitor comments from Fed officials about future monetary policy. For economic data, Existing Home Sales will come out on Monday. The Consumer Price Index (CPI), a widely followed monthly inflation indicator that looks at the price changes for a broad range of goods and services, will be released on Tuesday. The Producer Price Index (PPI), another monthly inflation indicator, will come out on Wednesday. Import Prices and Retail Sales will be released on Thursday. Since consumer spending accounts for over two-thirds of U.S. economic activity, the retail sales data is a key measure of the health of the economy.