How Market Traders View Today’s Jobs Data

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Today's Non-Farm Payrolls report damaged more than ADP's economic forecasting reputation -- it also damaged the market's hope that Fed will lower the Fed Funds Rate by May.

Prior to this morning's release, the Fed Fund Futures reflected a 53% chance that the FFR would drop from its current 5.250% level at or before the May FOMC meeting.  According to David Gaffen of the Wall Street Journal, the probability is now 34%. This expectation change will pressure mortgage rates higher. 

Why?  Because job creation is one signal of an expanding economy and this will force the FOMC to change course -- it had been planning for a gradual slowdown in 2007.

The Non-Farm Payrolls report offer key clues to the overall growth of the US economy and the logic works like this:

1. Growing companies hire new workers that were previously unemployed
2. New workers earn money that they didn't earn while unemployed
3. Money gets spent and put back into the economy
4. Companies continue to grow to meet the growing demands of consumers/workers

In addition, wages generally move higher in an expanding economy as companies try to keep their employees and we saw evidence of that in December as well; today's release showed a 0.5% increase in hourly earnings versus an expectation of 0.3%.

Once more, more money is earned and, therefore, more money is spent, propelling the economy forward.

Whereas last month markets were waiting for the other shoe to drop on the economy, they are now bullish on growth.  That does not bode well for people who have shopping for homes, or have not yet locked their mortgage rates in advance of a planned closing.

(Image source: ekkyp)