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Mortgage rates were headed up again Friday after the release of a “head scratching” blowout jobs report that kills “stone dead” any chance that the Federal Reserve will begin lowering short-term interest rates in March, economists said.
U.S. businesses and government agencies added a seasonally adjusted 353,000 workers to their payrolls in January — close to twice as many jobs as expected — and the 0.6 percent increase in hourly earnings, to $34.55, was double the consensus.
The strong jobs report is good news for the economy, with more forecasters now expecting that past Fed interest rate hikes will cool inflation and produce a “soft landing,” rather than a recession, in 2024. But it comes on the heels of cautionary language from Federal Reserve policymakers at their first meeting of the year Wednesday on the timing of expected rate cuts.
While Fed officials indicated this week that they think inflation is headed in the right direction, they want to see more data before starting to bring the short-term federal funds rate — which is at the highest level since 2001 — back down. A March rate cut is not “the base case,” Fed Chair Jerome Powell said this week.
“If the March rate cut wasn’t already dead, it is now,” thanks to the strong jobs report, Pantheon Macroeconomics Chief Economist Ian Shepherdson said in a note to clients. “This is the first blowout payroll number for a while, and it is spectacular; the net headline increase, including revisions, is 479K.”
The numbers come “out of the blue,” Shepherdson said. “We saw a bit of upside risk to the consensus, but nothing like this much — and the gains are spread across the economy.”
Payrolls post strongest growth in a year
The monthly Employment Situation report from the U.S. Bureau of Labor Statistics showed the strongest payroll growth in a year, with the 74,000 professional and business services jobs added in January, “considerably higher than the average monthly increase of 14,000 jobs in 2023.”
Health care employment, which has grown by an average of 58,000 jobs a month in 2023, rose by 70,000 workers. Other sectors posting above-average gains included retail trade (45,000 jobs added), social assistance (30,000 jobs added) and manufacturing (up 23,000 jobs).
While federal, state and local governments added 36,000 jobs, that was below the average monthly gain of 57,000 jobs in 2023.
“We believe that if job growth continues at such a strong pace, this could potentially result in a slower pace of policy rate cuts than what is currently expected by the market,” Fannie Mae Deputy Chief Economist Mark Palim said in a statement. “It could also present some upside risk to mortgage rates over the coming months, which would dampen increased housing demand coming from stronger job growth.”
10-year Treasury yields leap on strong jobs report
Yields on 10-year Treasury notes, a barometer for mortgage rates, surged 19 basis points (about a fifth of a percentage point) Friday, and lender surveys by Mortgage News Daily showed rates on 30-year fixed-rate mortgages jumping by 29 basis points, to 6.92 percent.
Long-term interest rates had been trending down this week, as the Fed is still expected to cut rates in May. The CME FedWatch Tool, which tracks futures markets to predict future Fed moves, on Friday put the odds of one or more Fed rate cuts by May 1 at 71 percent.
Mortgage rates and long-term Treasury yields had also been easing after New York Community Bancorp reported a surprise loss Thursday, raising concerns about the health of regional banks, Reuters reported.
“The bottom line here is that Fed officials will regard [Friday’s jobs] report as a vindication, at least for now, of their decision to resist market pressure to cut rates in March,” Shepherdson said.
While the “head-scratching numbers” kill the chance of March rate cuts “stone dead,” the May meeting is three months away, Shepherdson noted.
“We expect the labor market picture by then will be much less strong, and the inflation numbers will be benign, so we expect a 25 basis point cut” in May, he said.
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Email Matt Carter