Inflation concerns hit bond markets this week. Despite soothing comments from Fed Chief Bernanke, stronger than expected economic growth and higher commodity prices raised investor fears that future inflation may increase. As a result, mortgage rates moved higher during the week.
Global economic growth has been picking up, particularly in developing countries, which has increased the demand for commodities. Many developing countries already have had to deal with rising inflation, and readings in Europe have moved higher recently as well. In the US, Fed officials tend to focus on core inflation (which excludes food and energy), and these measures have been extremely low. According to Bernanke, slow wage growth and slack in the US economy will help keep core inflation in the US low for quite a while. This has allowed Fed officials to keep monetary policy loose to boost the economy. Investors, though, have grown more concerned about the risk that the Fed's stimulative policies will lead to significantly higher long-term inflation.
While the headline number fell short, this week's Employment report was considered to be positive overall, and mortgage rates moved higher after the news. Against a consensus forecast of 140K, the economy added just 36K jobs in January. The Unemployment Rate was expected to increase to 9.5% from 9.4% in December. Instead, it dropped to 9.0%, the lowest level since April 2009. Economists suggest that a number of factors were responsible for the divergence between the two sets of data. First, bad weather distorted the results in many regions. Second, the Unemployment Rate reflects both smaller companies and larger companies, while the payrolls data captures only larger companies. Finally, the January data tends to be the least reliable month of the year. After examining the details, investors placed more weight on the growth in jobs among the small businesses and self-employed, and they expect the payrolls data to "catch up" in future months.