Mortgage rates had been spending the last few months obsessively refreshing war-related headlines, but on Friday they finally found something else to focus on: a blockbuster jobs report. The result? Rates jumped to their highest levels in two weeks.
They’re still not quite back to the recent peak seen on May 19th, but Friday’s move was significant—and a little unusual based on recent trends.
For the past three months, mortgage rates have largely been driven by developments surrounding the Iran war. It’s not that bond markets are military strategists, of course. Rather, investors have been focused on what the conflict could mean for oil prices and inflation. Since bonds are highly sensitive to inflation, and mortgage rates are directly tied to bond markets, every new headline has had the potential to move rates.
When inflation isn’t threatening to throw a party and invite everyone, bonds usually spend most of their time worrying about the economy instead. Economic data has been fairly balanced lately—not strong enough or weak enough to steal the spotlight from war-related inflation concerns. Friday’s jobs report, however, had other plans.
The monthly jobs report is always one of the market’s favorite drama series, but even it had taken a back seat recently. This time, though, the numbers were so strong that they sent financial markets into full “record scratch” mode.
Economists expected the U.S. economy to add about 85,000 jobs in May. Instead, payrolls surged by 172,000. That alone would have been impressive, but the real surprise came from revisions to the previous two months.
Back in April, March job growth was reported at 178,000—strong, but easy to dismiss as a one-off bright spot amid otherwise average data. Then in early May, April’s number came in at 115,000, and markets barely blinked.
As is often the case, those figures were later revised as additional survey responses arrived. This time, the revisions were substantial. March’s total jumped from 178,000 to 214,000, while April’s figure climbed from 115,000 to 179,000.
Suddenly, the labor market’s story changed overnight. What had looked like a gradual slowdown now looked surprisingly resilient. Some analysts would even argue that hiring growth is beginning to accelerate again. Looking at moving averages certainly helps make that case by smoothing out the monthly noise.
Of course, not everyone is ready to declare a comeback tour. Others point out that the broader downward trend may still be intact and that recent results simply pushed toward the upper edge of that trend channel.
Either way, the market’s reaction was clear. Investors concluded that the Federal Reserve has little reason to consider cutting rates anytime soon—regardless of what’s happening in the Middle East. In fact, some traders are now entertaining the possibility of rate hikes later this year and into early next year.
Fed Funds Futures are currently pricing in two potential rate hikes by March of next year. That’s quite a turnaround considering that before the Iran war, markets expected two rate cuts over the same period. In other words, expectations have swung by a full percentage point.
The broader bond market tends to react quickly when expectations for Fed policy change this dramatically, and mortgage rates were no exception.
For anyone hoping for better news, there are still a few reasons not to panic. First, rates remain below the highs reached on May 19th. Second, a confirmed peace agreement between the U.S. and Iran would likely remove some inflation concerns and could help push rates lower again.
It’s also worth remembering that labor market data has been unusually volatile lately. Lower survey response rates—an issue that became especially noticeable after last year’s government shutdown—have made revisions larger and more frequent than normal.
In other words, Friday’s jobs report was undoubtedly strong, but whether it marks the beginning of a sustained rise in rates depends on what future economic data has to say. If upcoming reports continue singing the same tune, rates could keep moving higher. If not—or if geopolitical tensions ease—the story may look very different a few weeks from now.