Mortgage Rates Jump Higher Following Surprisingly Strong Jobs Report

A much stronger-than-expected September jobs report pushed mortgage rates up from 6.26% to 6.53% today. Debate about Federal Reserve rate cuts will now shift from choosing between a pace of 25 bps or 50 bps cuts each meeting, to choosing between 25 bps each meeting or 25 bps every other meeting. Ultimately, the answer will be determined by data in upcoming months, clarifying how weak the labor market is.

254,000 jobs were created in September and the unemployment rate declined 17 bps from 4.22% to 4.05%, blowing past expectations of roughly 150,000 jobs created and the unemployment rate remaining at 4.2%. To put in context how surprising these numbers were, the number of jobs created in September was also higher than the three-month moving average job creation rate for the past six months. Most of the job creation was in hospitality (78,000), healthcare (45,000), and government (31,000). Construction job creation remained fairly constant at about 25,000. About 7 bps of the 17 bps decline in the unemployment rate came from 20-24 year olds leaving the labor force, probably heading back to college, indicating that the unemployment rate could have been temporarily elevated by college students looking for summer work and not finding it. The Bureau of Labor Statistics reports that they saw no discernible effects from Hurricane Francine in this month’s report. However, next month’s jobs report will include the effect of Hurricane Helene as well as the ongoing Boeing strikes. The short-lived port strikes will have no effect.

In the context of all recent labor market data, including job openings, quits, and unemployment insurance claims, the labor market has weakened meaningfully, but it is clearly on solid footing. Today’s report pushes the three-month moving average of the job creation rate to 186,000 jobs per month, less than half of what it was two years ago and 13% lower than it was a year ago. The three-month moving average of the unemployment rate remains at 4.2% meaning the Sahm Rule is still triggered as it is half a percentage point higher than it was in January. Unemployment claims remain low at around 220,000 per week and job openings remain elevated at 8.04 million. Panning out to the rest of the economy, the consumer appears to be rock solid, with spending holding up and earnings reports generally strong. All in all, the economy appears to be at little risk of a recession, despite having cooled in this era of higher rates, with Q4 annualized GDP growth tracking at 2.5%. Importantly, there is also still little reason to worry about inflation re-accelerating. Indeed, today’s report most likely ups the probability of a soft landing.

There is no chance of a 50 bps cut in the November 7 Fed meeting now, with hawks likely to question whether the Fed should pause after the outsized 50 bps cut on September 18. There is one more jobs report coming on November 1, as well as an inflation report on October 10. There is practically no chance the next jobs reports will be weak enough to push the Fed to another 50 bps cut, as they will be able to ascribe any weakness to Helene. In contrast, if we see another blowout report like today (and the bar will be lower because of Helene) the hawks will have ammunition to argue that the Fed should be cutting 25 bps every other meeting. Indeed, before August 2, the forecasted unemployment rate was 4.1% (matching what was reported today) and the view was that the Fed would cut 25 bps every other meeting. Taking a broader view, however, it’s not clear that argument should carry the day, since fundamentally, inflation is still headed back to target and the labor market is not strong enough to generate more inflation. So, it’s not clear why the Fed Funds rate should remain in such restrictive territory. While no one ever knows where neutral is at any given moment, it’s almost surely not at 5%, where the Fed Funds rate currently stands.

The daily average 30-year fixed mortgage rate climbed from 6.26% to 6.53% following today’s report. Rates will remain higher until there is more evidence of economic weakness. Further evidence of more economic strength than expected would push rates even higher. With a recession a more distant possibility after today’s data, much lower rates in the near- to medium-term seems unlikely, even as the Fed slowly eases.

Updated at 1:00pm ET to reflect latest daily mortgage rate data.

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