The stronger-than-expected May jobs report will reverse mortgage-rate declines from the last two weeks. But ultimately, the Fed’s decision about interest rates will be decided by inflation data.
The May jobs report was hotter than expected, which is likely to drive mortgage rates up to end the week, reversing mortgage-rate declines from the last few weeks. But fresh inflation data comes in five days, and will be much more decisive for any Fed rate cuts this year.
The numbers. The unemployment rate rose unexpectedly to 4.0% from 3.9%, but the more reliable survey of firms indicated that the economy added 272,000 jobs in May, much more than the 180,000 expected. Average hourly earnings also rose 0.4% MoM (4.1% YoY), faster than the expectation of 0.3% MoM 3.9% (YoY).
Ultimately, the labor market is cooling, but the path is bumpy. The unemployment rate has edged up from a low of 3.4% early in 2023 to 4.0%. And the three month moving average of growth in payrolls has come down from the half million range in 2022 to about half that now. Earlier this week, we also got news that the JOLTs data on job openings and turnover came in significantly weaker than expected. Specifically, the number of job openings per unemployed person, a key measure of labor market tightness, has finally come back to pre-pandemic levels.
Today’s data will reverse much of the rate drops from the last two weeks, but ultimately Fed policy will be decided by inflation data. Ten yield Treasury yields and mortgage rates had come down on weaker than expected ISM and JOLTS data in the hopes that a rate cut in late summer is more likely, but markets are reversing course in reaction to this jobs report. Traders are expecting that this report virtually eliminates the odds of a July rate cut and decreases the odds of a September one. Next Wednesday brings fresh CPI data on the same day as the June Fed press conference, however, and Powell has already indicated that his main focus is on inflation data since the Fed is not relying on labor market weakening to bring inflation back to target.
