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“Hard data is derived from
actual numbers. This includes
jobs data and gross domestic
product (GDP), or the total
value of goods and services
produced by the country.”
Each week, macroeconomic funda- mentals are released. Some of these come from the government, some from professional organizations such as the National Association of Realtors or Mortgage Bankers Association, and some
from other business or academic sources.
There is “hard” data and “soft” data. Hard
data is derived from actual numbers. This
in-cludes jobs data and gross domestic product (GDP), or the total value of goods and services produced by the country. Soft data is
derived from opinion surveys. These include
reports like Consumer Sentiment, Housing
Market Index and Small Business Optimism.
Hard data is, in general, more important than
The movement of markets in reaction to
economic fundamentals is not immediately
based on the data itself but more on how the
released data varies from what consensus
expected it to be. There is a saying, “Markets
are made on the margins.”
On a given day the large holders of U.S.
Treasury debt neither buy nor sell a significant
portion of their portfolio. It is people who
hold this debt for short-term profits who
trade. Their positions are based on short-term
Their trades are driven by deviation of the
released data from expectations. If data surprises, it is this set of people with one foot
in the pool who move the market that day.
Short-term reaction to data results from the
intent of those with short-term goals.
Mortgage interest rates move in harmony
with the yield on the 10-year U.S. Treasury
note. Treasury yields move in response to
inflation or, more accurately, the anticipation
of inflation. To understand why inflation and
perception of inflation are so important, you
must think like someone with $100 million in
If you’re wealthy, own your own home and
have little debt, the goal of your investing
strategy typically is to ensure you can buy as
much stuff with that $100 million in the future
as you can buy today.
You have one enemy: inflation. Consequently, you invest in fixed-income securities
such as corporate bonds, Treasury debt and
mortgage-backed securities. If annual inflation is running at 2 percent, and your average
annual return equals or exceeds that mark,
your $100 million is not losing any future purchasing power.
If inflation rises you will want better returns
to protect the future purchasing power of
your money. You will demand higher yields on
fixed-income securities. It is wealthy people
who buy fixed-income securities. Similarly, as
a mortgage originator, inflation is your enemy.
It is necessary to stay informed about signs of
There are two metrics of actual inflation —
the Consumer Price Index (CPI) and Producer
Price Index (PPI). CPI measures inflation at the
retail level. PPI measures inflation at the wholesale level. Increases in PPI do not always get
passed into CPI. As long as corporate profits
are high and there is com-petition for market
share, companies can absorb PPI increases in
order to maintain market share.
Fixed-income markets, including mortgage-
backed securities, do not appear, at present,
to tolerate CPI exceeding about 2.5 percent
annually. Consistent increases above that will
send interest rates up.
The Employment Situation Report, or the
labor report, from the Bureau of Labor Statistics (BLS) is important because it gets an
enormous amount of media attention.
People understand jobs and unemployment
better than they understand CPI.
Politicians love to take credit for any increase
in jobs. This attention gives the labor report
the power to significantly move Treasury
yields and mortgage rates. The underlying
concern is that low unemployment will cause
wage inflation. Inflation in wages is different
from inflation in the price of goods because
wage inflation is thought to be “sticky,” meaning wages do not fall when unemployment
There are a few items of note which do
not get discussed enough regarding the BLS
report. The headline reported data is seasonally adjusted. There are very large seasonal
adjustments before and after Christmas.
These adjustments can be 10 to 20 times the
size of the headline number, making data for
those months less significant.
The BLS report for January 2018, for example, showed a seasonally adjusted gain of
200,000 jobs but a loss of 3,085,000 when
not seasonally adjusted. The seasonally adjusted number is what is important but, in
months when the adjustment is very large,
are we measuring the change in jobs or are
we measuring the accuracy of the seasonal