Weak jobs and manufacturing reports provide no relief for mortgage rates

Whether it’s refining your business model, mastering new technologies or discovering strategies to take advantage of the next market wave, Inman Connect New York will prepare you to take bold steps forward. The next chapter is about to begin. Be part of it. Join us and thousands of real estate leaders January 22-24, 2025.

Weak jobs and manufacturing reports that under other circumstances might have taken some pressure off mortgage rates had the opposite effect on Friday as bond market investors looked ahead to next week’s elections, the Federal Reserve meeting and Treasury auctions.

Employers added just 12,000 workers to their payrolls in October, the Bureau of Labor Statistics reported reportedand previous job growth estimates in August and September were revised down by a total of 112,000 workers.

Given these types of numbers, bond market investors would typically move out of Treasuries and mortgage-backed securities on expectations that the Federal Reserve will accelerate plans to cut interest rates this year and next.

After the publication of the jobs report, the yield on ten-year government bonds initially fell by six basis points to 4.22 percent. But ultimately, the yield on ten-year government bonds – a barometer for mortgage rates – had fallen. rose by 14 basis points from the low of the day to a close of 4.36 percent, a level not seen since early July.

An index maintained by Mortgage news daily showed that the interest rate on 30-year mortgages remained stable at 7.09 percent on Friday.

Fed policymakers are expected to take Friday’s weak jobs report to heart, as Hurricanes Helene and Milton and a strike by Boeing machinists were expected to weigh on job creation in October.

But strikes and hurricanes “only explain part of the weakness,” Samuel Tombs, chief economist at Pantheon Macroeconomics, said in a note to clients.

Excluding the sectors that typically bear the brunt of hurricanes – temporary relief, leisure and hospitality – and the strike-hit transportation equipment manufacturing sector, wages rose by just 69,000 in October, or half the average of the previous twelve months, Tombs noted.

That slowdown in hiring “seems more apparent after the massive downward revisions to payrolls in August and September,” Tombs said.

Job growth is slowing

Payrolls are now thought to have grown by just 78,000 in August, down from 159,000, and September wage growth was revised down to 223,000 from 254,000.

“As things stand, the six-month average in September – before the Boeing attacks and hurricanes – was just 148,000, almost 100,000 fewer than the previous six months,” Tombs noted. “It wouldn’t be surprising if that number were also revised slightly lower, given the pronounced pattern of downward revisions recently.”

Another indication that the economy is cooling down came from the latest figures ISM production reportwhich showed that the manufacturing sector shrank in October for the seventh month in a row and the 23rd time in the past 24 months.

The ISM manufacturing index fell only slightly in October, to 46.5 percent, but it was the lowest reading of the year, and forecasters had expected the index to improve to 47.2 percent.

Any reading above 42.5 percent over a period of time “generally indicates an expansion of the overall economy,” the Institute for Supply Management said in releasing the latest figures.

A slight increase in new orders was a “relative bright spot” in the report, Pantheon Senior US Economist Oliver Allen said in a note to clients.

Oliver Allen

“We are skeptical that the industry’s fortunes will improve meaningfully any time soon, despite the increase in new orders in October,” Allen said. “Most surveys of investment intentions remain very low, bank credits remain scarce, corporate bond yields are relatively high and external demand is too weak to significantly shift prices. For the time being, production is clearly struggling.”

The unemployment rate remains stable

Hurricanes and strikes had no impact on October’s unemployment figures, which are based on data from household surveys. Workers are still counted as employees even if they are on strike or unable to work due to inclement weather, Allen noted.

Nevertheless, the number of unemployed rose by 150,000 to 6.98 million in October.

Although the unemployment rate increased from 4.05 percent to 4.14 percent over the same period, this is within the study’s margin of error. Rounded to the nearest tenth of a percentage point, the unemployment rate remained unchanged at 4.1 percent.

A rise in unemployment in July had the ‘Sahm rule”, a recession indicator named after economist Claudia Sahm.

“The 4.1 percent unemployment rate meant we were no longer violating the ‘Sahm Rule,’ a recession indicator and welcome news,” said Diane Swonk, chief economist at KPMG. posted on X.

Such “rules were meant to be broken,” Swonk said, and other labor market reports are also encouraging.

Those include Wednesday’s ADP report estimating that private employers added 233,000 jobs in October and improving optimism about job availability in the Conference Board Consumer confidence index for October.

Why mortgage rates are rising

Although inflation is gradually falling toward the Fed’s 2 percent target, long-term Treasury and mortgage yields have risen since Fed policymakers approved the first rate cut in more than four years on September 18.

The Fed has no direct control over long-term interest rates, and they have risen after a series of data reports showed that the economy is surprisingly healthy and could still be sensitive to inflation.

The strength of the economy is raising doubts about how quickly the Fed will cut short-term interest rates, but there are also concerns about growing national debt.

“Legislation vigilantes” argue that “regardless of which party wins the White House and Congress, fiscal policy will widen the budget deficit and drive up inflation,” Wall Street veteran Ed Yardeni warned on Monday, as mortgage rates rose above 7 percent.

The CME FedWatch tool shows that after the jobs report, investors in futures markets are more confident than last week that the Fed will approve 25 basis point rate cuts at each of their remaining meetings this year, on November 7 and December 18.

But futures markets show that investors are increasingly taking Fed policymakers at their word that they will be cautious about the pace of future rate cuts.

“The low conviction is partly due to Tuesday’s US presidential election and Thursday’s Federal Reserve meeting,” said Bloomberg interest rate strategist Alyce Andres. said Friday. “If it weren’t for these two upcoming events, a big payroll miss and downward revisions would have led to a much bigger drop in yields.”

Another key indicator of the future path of mortgage rates is on deck Tuesday, when the Treasury Department will hold a quarterly auction of 10-year Treasury notes.

Next to $42 billion in 10-year government bonds, auctions of $58 billion in 3-year bonds and $25 billion in 30-year bonds are also possible. on deck next week. The auctions will reveal what yields investors are willing to accept on $125 billion of government debt.

Receive Inman’s mortgage newsletter directly in your inbox. A weekly roundup of all the world’s biggest mortgage and closing news, delivered every Wednesday. Click here to subscribe.

Email Matt Carter