Your Mortgage Minute 10/4

Your Mortgage Minute:

• Mortgage rates are rising due lower than expected unemployment and much higher than expected jobs created
• As a result of these reports, the market is now projecting no chance of a 50 point rate cut in November, and a small probability of a rate pause
• Like overly optimistic reaction to the July edition of today’s report, I feel this is an overreaction and that the market will correct
• Next week’s two inflation reports, Consumer Price Index (CPI) and Producer Price Index (PPI), along with initial jobless claims look to be the most influential on mortgage rates

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Strong Job Reports Leads to Mortgage Rate Increase (9/30-10/4)

It has been a rough day for mortgage rates. After creeping up for the first four days, a lower than expected unemployment rate and MUCH higher than expected jobs report today has led to mortgage rates spiking.

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Despite declining initial jobless claims (a leading indicator), the unemployment rate was projected to stay flat at 4.2%. Instead we saw it decline to 4.1%. Additionally US nonfarm payrolls numbers came in over 100k higher than expected. This combined with the past two employment reports revised upwards and a higher than expected ADP report on Wednesday points to a very strong job market.

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Today's news dramatically shifted market expectations for November's Fed meeting. Previously, the market anticipated a rate cut, with a 68% chance of a 25 point reduction and a 32% chance of a 50 point cut as of yesterday (per the CME group’s Fedwatch tool). Now, the probability of a 50 point cut has dropped to 0%, while the likelihood of a rate pause has risen to 2.9%. A 25 point cut remains the most probable outcome.

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It's important to note that today’s reports don't reflect two recent events: the port workers strike and Hurricane Helene. The hurricane's impact should be more noticeable in the data, as striking workers aren't counted in jobless claims. For context, the highest unemployment and jobless claims over the past year occurred during Hurricane Beryl. Yesterday's initial jobless claims report, which includes the first days after Helene, came in higher than expected. This suggests a full week’s worth of impact will cause this figure to rise further. It’s because of this that I don’t anticipate a rate pause in November.

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Consumer Price Index Highlights Next Week

September’s Consumer Price Index (CPI) report, released next Thursday, is likely to be the week's most influential report. Then on Friday we get personal product index (PPI), which measures manufacturing inflation. Though less directly impactful to consumers, this can have a trickle-down effect into future consumer inflation and can therefore be a market mover if it comes in far from expectations.

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While taking a backseat in recent months to today’s jobs data, CPI is still a crucial market mover. Its significance stems from its early monthly release and close alignment with the Federal Reserve's preferred inflation metric, Personal Consumption Expenditures (PCE). CPI captures about 70% of the factors considered in PCE, making it a valuable predictor of the Fed's inflation outlook.

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While the past few months we’ve had as expected or better numbers for core and headline CPI, year over year inflation remains over the Fed’s 2% target largely due to shelter costs. Last month we saw a year over year increase in shelter, the first time since early 2023 but this was largely due to a very low month over month figure we were replacing from 2023 (0.3%).

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This month we’re replacing a figure of 0.6% so we should see some kind of decline year over year, since the past 5 months we’ve had month over month increases of just 0.2-0.4%. If we get another 0.4% month over month reading (meaning a 0.2% decline year over year) that will not move the needle much, as this will signal little improvement in current shelter costs. But a 0.2% or lower reading, which we saw in June, would be great news for mortgage rates.

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Lock Recommendation in a Volatile Market

In general, I see today as the opposite end of the spectrum of the July edition of today’s jobs report. A good indicator of market volatility is seeing how Fed rate probabilities move on the CME group’s Fedwatch tool, and today’s have been by far the biggest since the release of that July report.

For a few days I could see the market overreact to today’s news, but ultimately I still think we’re heading for a quarter point rate cut. For those who didn’t heed my advice to lock after today’s unemployment report came in low I would recommend floating until the dust settles from today’s report, with a plan to lock if CPI shelter data comes in at a 0.4% or higher.

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For any questions or personalized lock guidance, please contact me directly at 617-620-0083.

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