How Wage Inflation Concerns Do A Number On Mortgage Rates

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Because of technical trading factors, prices on mortgage bonds plummeted last week, dropping more than 50 basis points overall.  Mortgage rates are now at their highest levels in several months.

And, unfortunately for home shoppers, it looks like the trend will continue for some time.

Traders took special notice of last Thursday's Initial Jobless Claims figures.  Normally, this weekly release is as much of a non-event as a Purdue-Indiana football game. 

But this week's surprising strength dropped the one-month average of Americans filing for unemployment to a one-year low.

This is the now the third of three major data points that may be pointing to wage inflation in the US:

1. New unemployment claims are at their lowest rolling average in a year
2. The unemployment rate's steady decline continues
3. Hourly workers are earning more money for their labor

Here's why wage inflation concern markets:

More people working means higher costs for business.  Eventually, those costs get passed on to consumers (who ironically don't really mind/notice because they're taking home a bigger paycheck).

So, consumers pay more for everyday items but that higher cost is offset with their higher income. 

More dollars to buy the same goods -- this is inflation in action.  In an inflationary environment, each dollar is worth less versus the value of the item being purchased so it takes more dollars to buy the same item.

Inflation is universally bad for mortgage bonds because mortgage bonds pay out to investors in U.S. dollars.  When the dollare are "less valuable", the demand for the bonds drop and with reduced demand comes higher rates.

This Thursday, we'll see where Initial Jobless Claims registers.  If it's less than 305,500, that moving average will drop again.