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Latest jobs numbers could be nail in the coffin for interest rate hikes

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A mixed payroll and unemployment report sent long-term interest rates surging Friday on fears of further rate hikes, but some analysts say the latest numbers could actually reduce the odds that Federal Reserve policymakers will raise rates again at their Sept. 20 meeting.

In their attempts to rein in inflation, Fed policymakers have been keyed in to labor markets and wages. So any indications that employers are having to compete for workers by paying higher wages often sends interest rates soaring.

Statistics from two monthly surveys released by the Bureau of Labor Statistics Friday showed payroll employment increasing by 187,000 workers in August — 17,000 more jobs than consensus estimates.

But with BLS analysts trimming 110,000 jobs from their previous payroll estimates for June and July, “the cumulative effect is a noticeable slowdown in the job market,” Mortgage Bankers Association Chief Economist Mike Fratantoni said in a statement. The revisions suggest the bureau overstated the number of people working in real estate in July by about 3,700.

The big surprise was that instead of staying at 3.5 percent, as expected, the unemployment rate rose to 3.8 percent, Pantheon Macroeconomics Chief Economist Ian Shepherdson said in a note to clients Friday.

The increase in the unemployment rate was triggered by a “huge” jump in the labor force, with 736,000 people entering the job market, Shepherdson noted. An increase in the size of the labor force can reduce pressure on wages. Although average hourly earnings rose 0.2 percent in August that was also below consensus expectations for 0.3 percent hourly wage growth.

While month-to-month movements in survey-based data are subject to revision, “the August headline unemployment rate is the highest since February 2022, and appearances matter,” Shepherdson said — especially since Federal Reserve Chairman Jerome Powell said in a speech at Jackson Hole last week that he wanted to see a further “rebalancing” in the labor market.

“Well, here it is — at least until the September report is released,” Shepherdson said — data that won’t come out until after the Federal Open Market Committee’s Sept. 20 meeting.

“This report clearly increases the pressure on the Fed not to hike this month, and it would now take horrific PPI [producer price index] and CPI [consumer price index] data to trigger action,” Shepherdson said. “We remain of the view that the Fed is done [raising rates], and that the next move will be an easing, as soon as next March.”

Fratantoni was also of the view that the report “should be enough for the Fed to keep the federal funds target rate on hold at its next meeting,” he said. “We expect that they will hold here until next spring, and their next move should be cut. The combination of a still strong job market, and rates that should trend down over time, is positive for the housing market.”

Futures markets tracked by the CME FedWatch Tool put the probability of a September Fed rate hike at just 7 percent on Friday, down from 12 percent the day before.

10-year Treasury yields jump Friday

Source: Yahoo Finance.

Bond market investors initially didn’t share that view, dumping bonds Friday ahead of the approaching three-day Labor Day weekend.

Since bond yields and prices move in the opposite direction, yields on 10-year Treasurys surged more than 10 basis points after the release of the payroll and unemployment report. Yields on 10-year bonds, which often predict where mortgage rates are headed next, retreated slightly from Friday’s high yield of 4.20 percent in afternoon trading.

Mortgage rates retreat from post-pandemic highs

Rates on 30-year fixed-rate conforming mortgages — which according to Black Knight’s Optimal Blue Mortgage Market Indices hit a post-pandemic high of 7.30 percent on Aug. 22 — have come down since then on encouraging inflation data, including Tuesday’s Job Openings and Labor Turnover Summary (JOLTS) which showed job opening edging down at the end of July by 338,000 to 8.8 million.

The Mortgage News Daily rate index shows rates for 30-year fixed-rate mortgages were up almost imperceptibly Friday, rising by a single basis point to 7.08 percent. A basis point is one-hundredth of a percentage point.

A weekly survey of lenders by the Mortgage Bankers Association released Wednesday shows homebuyer demand for purchase mortgages picked up last week for the first time in six weeks.

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Email Matt Carter