Why does the Non-Farm Payroll report affect mortgage rates?

jobs report pushing rates downHave you ever wondered why a single report could have such a huge effect on mortgage interest rates?

The non-farm payroll figure (a.k.a. NFP) represents the number of jobs added or lost in the economy over the last month, not including jobs relating to the farming industry. The farming industry is not included because its seasonal hiring distorts employment numbers around harvest time. Non-farm payroll is an important day trading indicator because it affects all markets; the job market impacts the FX, bonds, stocks, and derivatives markets.

From a basic economic sense, when the NFP shows an increase in jobs it means the economy is doing well. An increase in employment means that companies are growing, and a secondary benefit is that the newly hired workers will have more money to spend on goods and services. A decrease means that the opposite is true. NFP and the overall job market have become key indicators for traders and that is reflected in the market’s sensitivity to the non-farm payroll report. The report includes the unemployment rate, what sectors have increased or decreased their workforce, what the average hourly earnings are, and any revisions that need to be made to prior reports.

So why does it help mortgage rates? 

To put it very simply, a poor report highlights the lack of economic growth.  Lack of economic growth is good for bonds, including MBS (mortgage-backed securities), the key driver to mortgage rates.  So when a report comes in showing weakness traders are more likely to buy bonds including MBS which helps mortgage rates.

The question now is how long will the effect last?  Be sure to stay in contact with me to monitor mortgage rates through the week as the NFP and myriad other economic reports heavily influence mortgage bonds….thus interest rates.


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