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Weak jobs and manufacturing reports that under other circumstances might have taken some pressure off of mortgage rates had the opposite effect Friday, as bond market investors looked ahead to next week’s election, Federal Reserve meeting and government bond auctions.
Employers only added 12,000 workers to their payrolls in October, the Bureau of Labor Statistics reported, and previous estimates of job growth in August and September were revised down by a total of 112,000 workers.
Those kinds of numbers would typically have bond market investors snatching up government debt and mortgage-backed securities on expectations that the Federal Reserve will accelerate plans to cut rates this year and next.
Following the release of the jobs report, yields on 10-year Treasurys did initially dip six basis points, to 4.22 percent. But by the end of the day, the 10-year Treasury yield — a barometer for mortgage rates — had climbed 14 basis points from the day’s low to close at 4.36 percent, a level not seen since early July.
An index maintained by Mortgage News Daily showed rates on 30-year fixed-rate mortgages holding steady at 7.09 percent Friday.
Fed policymakers are expected to take Friday’s weak jobs report in stride, since Hurricanes Helene and Milton and a strike by Boeing machinists had been expected to weigh on October job creation.
Samuel Tombs
But strikes and hurricanes “explain only some of the weakness,” Pantheon Macroeconomics Chief U.S. Economist Samuel Tombs said in a note to clients.
Excluding sectors that usually bear the brunt of hurricanes — temporary help and leisure and hospitality — plus the strike-impacted transport equipment manufacturing sector, payrolls increased by just 69,000 in October, or half the average of the previous 12 months, Tombs noted.
That slowdown in hiring “looks more pronounced after the huge downward revisions to August and September payrolls,” Tombs said.
Job growth slows
Payrolls are now thought to have grown by only 78,000 in August, rather than 159,000, and September payroll growth was revised down to 223,000 instead of 254,000.
“As things stand, the six-month average in September — before the Boeing strikes and hurricanes — was just 148,000, down almost 100,000 from the previous six months,” Tombs noted. “It would be unsurprising if that number were to be revised a bit lower too, given the pronounced pattern of downward revisions lately.”
Another indication that the economy is cooling came from the latest Manufacturing ISM Report, which showed the manufacturing sector contracted in October for the seventh consecutive month and the 23rd time in the last 24 months.
The ISM manufacturing index dipped only slightly in October, to 46.5 percent, but it was the lowest reading of the year, and forecasters had expected the index to improve to 47.2 percent.
Any reading above 42.5 percent over a period of time, “generally indicates an expansion of the overall economy,” the Institute for Supply Management said in releasing the latest figures.
A slight pickup in new orders was a “relative bright spot” in the report, Pantheon Senior U.S. Economist Oliver Allen said in a note to clients.
Oliver Allen
“We are skeptical that the sector’s fortunes will start to improve meaningfully any time soon, despite October’s uptick in new orders,” Allen said. “Most survey measures of investment intentions remain very depressed, bank credit remains scarce, corporate bond yields relatively high, and external demand is too weak to shift the dial significantly. For now, manufacturing is clearly struggling.”
Unemployment rate holds steady
Hurricanes and strikes didn’t affect the October unemployment numbers, which are based on household survey data. Workers are still counted as employed even if they’re on strike or unable to work due to bad weather, Allen noted.
Nevertheless, the ranks of unemployed workers grew by 150,000 in October, to 6.98 million.
Although the unemployment rate edged up from 4.05 percent to 4.14 percent over the same period, that’s within the survey’s margin of error. When rounded to the nearest tenth of a percentage point, the unemployment rate remained unchanged at 4.1 percent.
A surge in unemployment in July had triggered the “Sahm Rule,” a recession indicator named for economist Claudia Sahm.
“The 4.1 percent unemployment rate meant that we are no longer breaching the ‘Sahm Rule,’ a recession indicator and welcome news,” KPMG U.S. Chief Economist Diane Swonk posted on X.
Such “rules were meant to be broken,” Swonk said, and other labor market reports are also encouraging.
Those include Wednesday’s ADP report estimating private employers added 233,000 jobs in October and improving optimism about the availability of jobs in the Conference Board Consumer Confidence Index for October.
Why mortgage rates are rising
Although inflation is gradually falling toward the Fed’s 2 percent target, long-term rates on government debt and mortgages have been on the rise since Fed policymakers approved the first rate cut in more than four years on Sept. 18.
The Fed doesn’t control long-term rates directly, and they’ve been rising after a string of data reports suggested the economy is surprisingly healthy and could still be susceptible to inflation.
The economy’s strength casts doubt on how quickly the Fed will bring down short-term rates, but there’s also concern about the growing national debt.
“Bond vigilantes” figure “no matter which party wins the White House and the Congress, fiscal policies will bloat the budget deficit and heat up inflation,” Wall Street veteran Ed Yardeni warned Monday, as mortgage rates surged past 7 percent.
The CME FedWatch tool shows that after the jobs report, futures markets investors are more certain than they were last week that the Fed will approve 25 basis-point rate cuts at each of their remaining meetings this year, on Nov. 7 and Dec. 18.
But futures markets show investors are increasingly taking Fed policymakers at their word when they say they will be cautious about the pace of future rate cuts.
“Low conviction is in part due to Tuesday’s U.S. presidential election and Thursday’s Federal Reserve meeting,” Bloomberg rate strategist Alyce Andres said Friday. “Had it not been for these two pending events, a big miss on headline payrolls and downward revisions would have elicited a much bigger slide in yields.”
Another key indicator for the future path of mortgage rates is on deck Tuesday when the Treasury Department is scheduled to hold a quarterly auction of 10-year Treasury notes.
In addition to $42 billion in 10-year Treasurys, auctions of $58 billion in 3-year notes and $25 billion in 30-year bonds are also on deck next week. The auctions will reveal what yields investors are willing to accept on $125 billion in government debt.
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