The jobs report stoked fears of a recession, sending 30-year fixed-rate mortgage rates to new 2024 lows as investors shifted from stocks to bonds.
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Be careful what you wish for, as the saying goes: Mortgage rates plummeted this week and stock market valuations tumbled on worries that the economy is not only slowing, but could be headed for recession.
A triple whammy of economic news sent investors fleeing stocks and into the safety of bonds — including the investments that fund most mortgages — causing long-term interest rates on bonds to plummet:
- On Wednesday, Federal Reserve policymakers signaled they were increasingly confident that inflation was under control enough to begin cutting interest rates in September.
- On Thursday, the U.S. Department of Labor reported that initial jobless claims jumped to 249,000 in the week ended July 27, the highest level in a year.
- That either-or combination then delivered the coup de grace on Friday: Employers added just 114,000 jobs in July, down from 179,000 in June. The U.S. Bureau of Labor Statistics reported that a combination of increased layoffs and decreased hiring pushed the unemployment rate to 4.3% in July.
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The spike in unemployment gave rise to the “Sam’s Rule,” a recession indicator named after economist Claudia Sam. Sam’s research shows that whenever the three-month moving average unemployment rate rises by 0.50 percentage point or more relative to the lowest three-month average in the previous 12 months, the economy may already be shrinking.
While mortgage rates have been gradually falling since late April, the declines accelerated this week, with an orderly rotation from stocks into bonds turning into a rush for exits on Thursday and Friday.
Stocks were boosted by Wednesday’s Federal Reserve meeting amid hopes the Fed will begin cutting interest rates in September and still achieve a “soft landing.” But stocks of large companies tracked by the S&P 500 fell 4% in heavy trading on Thursday and Friday morning.
Ian Shepherdson
Ian Shepherdson, chief economist at Pantheon Macroeconomics, said in a note to clients, “July’s poor jobs report led to the Fed’s decision this week to keep interest rates on hold, looking well behind the curve.
Shepherdson said that while investors have been expecting the Federal Reserve to cut short-term interest rates by 25 basis points (a quarter of a percentage point) next month, the likelihood that central bank policymakers will embark on a sharp 50 basis point cut is increasing.
The CME FedWatch tool, which tracks the futures market to forecast the likelihood of future Fed action, showed investors on Friday had priced in a 1.25 percentage point rate cut by the end of the year. This puts the futures market in line with what Pantheon Macroeconomics has been predicting for months.
Tara Sinclair
“To be clear, today’s labor market still looks good,” George Washington University economist Tara Sinclair wrote on Historically high. However, there is a lag in the effect of monetary policy, so the signal of rising unemployment is worrying.
Risk aversion is driving down mortgage rates as investors who fund most home loans view mortgage-backed securities (MBS) backed by Fannie Mae, Freddie Mac and Ginnie Mae as a safe place to park their money. Demand for bonds and MBS pushes up their prices and lowers yields.
10-year Treasury yields plummet
Source: Yahoo Finance.
The 10-year Treasury yield, a barometer of mortgage rates, plunged 18 basis points on Friday to 3.79%, a full percentage point below the 2024 high of 4.74% set on April 25 and the lowest since December. The minimum level of 27. A basis point is one hundredth of a percentage point.
Mortgage rates plummet
Rate lock data tracked by Optimal Blue showed the 30-year fixed-rate conforming mortgage rate was 6.58% Thursday, down 69 basis points from the 2024 high of 7.27% recorded on April 25 to February 1 lowest level since.
Although Optimal Blue’s data lags a day, lender data collected by Mortgage News Daily shows that 30-year fixed-rate loan rates dropped an almost unheard-of 22 basis points to 6.40% on Friday.
That means mortgage rates hit a new 2024 low on Friday.
But Zillow senior economist Orphe Divounguy warned that the decline in mortgage rates may not last, noting that Hurricane Beryl and the heat wave weighed on the latest jobs data, and the Atlanta Fed’s GDPNow model estimates the economy continues to grow at an annual rate The rate grew by 2.5%.
GDPNow “is not an official forecast from the Atlanta Fed,” but rather an ongoing estimate of actual GDP growth based on modeling data. But the Institute for Supply Management’s manufacturing purchasing managers’ index showed the economy continued to expand for the 51st consecutive month in July. The manufacturing PMI was 46.8%, down 1.7 percentage points from June. But a reading above 42.5% suggests the economy is expanding.
Aoife Devinge
“Yields and mortgage rates are unlikely to continue to fall without a shock that results in increased layoffs,” Dewanji said in a statement to Inman. “They may even rebound slightly as the Fed adjusts policy to extend the economic expansion. Most of the changes in Fed policy are already reflected in current interest rates. Finally, with no change in fiscal policy expected, government borrowing is also likely to be limited Treasury yields fell further.
Odetta Kush
Similarly, First American deputy chief economist Odeta Kushi pointed out that the increase in unemployment is “at least partly due to the growth of the labor force.”
“While lower mortgage rates are good news for potential homebuyers, we also hope that the labor market will be resilient,” Kush said in a statement. “Homebuyers need to feel confident in their jobs to make the possible It’s the biggest financial decision of their lives.”
Wage growth slows
Initial jobless claims rise sharply
Unemployment rate climbed to 4.3% in July
Editor’s note: This article has been updated to include comments from Zillow senior economist Orphe Divounguy and First American deputy chief economist Odeta Kushi, noting that the 10-year Treasury yield fell to 3.79% at Friday’s close.
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