The FED has made it clear that it wants to see the labor market weaken before it begins to cut rates.  With each economic report that showed a softening labor market, the financial markets have responded positively, because the markets understand that at this stage in this economic cycle, the labor data is what is driving the FEDs decision about when – and how much – to cut rates.

Just a quick reminder:  These articles I share here are researched and written by me!  As part of my commitment to ongoing support for my clients and partners, I write these articles to help them understand what’s really happening in the markets, beyond the headlines and soundbites.

In August, the Bureau of Labor Statistics revised its employment data and it turns out the economy added 818,000 fewer jobs than initially reported. 

As expected, mortgage rates improved after this news, as the markets welcome weakening labor data, which they know is critical to the FEDs decision-making process as it considers cutting rates.

Markets often anticipate the FED

Back in September, the FED announced it was reducing the Federal Funds Rate by .5%.  But when the cut was announced, mortgage rates actually increased a bit.  Why?

Because prior to the FED’s September announcement to cut, there had been a string of economic reports that indicated a weakening labor market – which is what the FED wants to see to continue cutting rates.  Markets knew that the softening labor market would encourage the FED to cut rates at their next meeting.  In anticipation of the September cut announcement, markets had already factored in the cut, before the announcement was even made.

So what happened last Friday?

Ahead of the JOLTS report (Job Openings & Labor Turnover Survey) that came out last Friday morning, markets were anticipating about 100,000 new jobs to have been added in the last month.

It turns out that Friday’s report showed that the economy has added 245,000 new jobs in the last month. 

That is exactly what the FED does not want to see – and the financial markets know it.

On Friday, hours after the red-hot labor report, mortgage rates jumped an average of .25%, which is significant for a single-day increase.

Below is a chart that tracks the value of Mortgage Backed Securities (MBS) – their value determines mortgage interest rates.  Their relationship is inverse – As MBS gain value, mortgage rates fall.  As MBS lose value, mortgage rates rise.  You can see that since September, mortgage rates have enjoyed a mostly-steady increase in value, which means rates have fallen.  But check out the last two red lines on the far right – You can see where MBS values plummeted after Friday’s red-hot jobs report.

What’s it mean?

Earlier this year, many were optimistic that once the FED started cutting rates, mortgage rates would enjoy a nice, predictable, steady decline.

Instead, this should be a wake-up call to everyone that while inflation is easing, markets are still extremely sensitive to financial news, all based upon action that the FED is expected to take.   

This report – and subsequent jump in mortgage rates – should also make it clear to everyone that above all else, markets are extremely reactive to employment data.  And if nothing else, the market’s reaction to the JOLTS report serves as a reminder that mortgage rates are dictated by the financial markets, rather than in response to a FED announcement.

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