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Major stock indexes took a dive Friday, dragging mortgage rates down with them on renewed worries about a recession following a report by the U.S. Bureau of Labor Statistics showing employers added fewer jobs than expected in August.
Nonfarm payrolls grew by just 142,000 last month, and “huge downward revisions to the last two month’s payrolls” means net job creation in August fell 100,000 jobs short of consensus projections, Pantheon Macroeconomics Chief Economist Ian Shepherdson said in a note to clients.
Shares in blue chip companies tracked by the S&P 500 were down 1.7 percent in afternoon trading, with the Dow Jones Industrial Average down 1 percent and the tech-heavy NASDAQ Composite index down 2.6 percent.
Mortgage rates often fall when investors move money out of the stock market and seek safety in bonds. Increased demand for bonds and mortgage-backed securities pushes the prices of those investments up and yields down.
Yields on 10-year Treasury notes were down by as much as eight basis points Friday morning, to 3.64 percent, before rebounding in afternoon trading. A survey of lenders by Mortgage News Daily showed rates on 30-year fixed-rate mortgages fell by the same magnitude Friday, to 6.27 percent.
Mortgage rates also dipped Wednesday following the release of the latest Job Openings and Labor Turnover Survey (JOLTS) report, which showed job openings shrank by 237,000 from June to July, to 7.67 million — the lowest level since January 2021.
The cooling in the jobs market has Federal Reserve Chair Jerome Powell signaling that policymakers are ready to start cutting rates on Sept. 18 for the first time in four years.
Futures markets tracked by the CME FedWatch tool on Friday suggested there’s a 75 percent chance that the Fed will start with a modest, 25 basis-point rate reduction. But the CME FedWatch tool put the odds of a 50 basis-point cut at 25 percent. A basis point is one-hundredth of a percentage point.
Mike Fratantoni
“Federal Reserve officials have recently pivoted from a primary focus on inflation to a more balanced view, with concerns both about inflation and employment,” Mortgage Bankers Association Chief Economist Mike Fratantoni said in a statement. “This report highlights that such a pivot makes sense, and that a 25-basis-point cut at its September meeting is a sensible first step at this time.”
Shepherdson said that even if the Fed hesitates and opts for a 25 basis-point cut, “we think the data will force them to be bolder at subsequent meetings. We continue to expect a 125 [basis point] easing by year-end, with a further 150 [basis points] to come in the first half of 2025.”
All told, Pantheon Macroeconomics forecasters see the Fed cutting rates by 2.75 percentage points by June 30, 2025. That would bring the target rate for the federal funds rate to between 2.5 and 2.75 percentage points, down from 5.25 percent to 5.5 percent.
The CME FedWatch tool shows futures markets see the Fed cutting at a less aggressive pace, with only a one in four chance that the federal funds rate will be below a target of 3 percent to 3.25 percent by June 30. But at the end of August, futures markets saw only a 4 percent chance of the Fed making such drastic cuts.
Mortgage rates falling
Rate-lock data tracked by Optimal Blue, which lags by a day, shows rates on 30-year fixed-rate conforming mortgages have come down by a full percentage point from their 2024 high of 7.27 percent on April 25, hitting a new low for the year of 6.26 percent on Thursday.
Optimal Blue data shows rates on 30-year fixed-rate mortgage rates have fallen by nearly 1.6 percentage points from a post-pandemic high of 7.83 percent registered Oct. 25, 2023.
Job growth cools
Friday’s payroll report also included downward revisions to previous estimates for June and July, with employers adding 86,000 fewer jobs than previously thought during those two months.
Ian Shepherdson
Based on the latest jobs numbers, Shepherdson thinks an “undeniable, broad-based downshift in hiring now is underway,” with the construction, manufacturing and real estate sectors looking “especially vulnerable to an employment shakeout ahead.”
For those worried about the prospect of a recession, a bright spot in the report was that the unemployment rate fell from 4.3 percent in July to 4.2 percent in August. At 7.11 million, the number of unemployed people was also down from 7.16 million in July.
Unemployment trending up
The July jump in unemployment triggered the “Sahm Rule,” a recession indicator named for economist Claudia Sahm. Sahm’s research has shown the economy is likely to already be shrinking whenever the three-month moving average of the unemployment rate rises by 0.50 percentage points or more relative to the minimum three-month averages from the previous 12 months.
But Shepherdson said the upward trend in the unemployment rate remains intact and the Sahm Rule is still in effect, with the three-month average unemployment rate still 0.54 percentage points above the 12-month average.
Shepherdson noted that the drop in August unemployment was driven by a 190,000 decline in temporary layoffs. Last month’s spike in temporary layoffs was likely caused by a “greater than usual concentration of auto plant shutdowns for annual retooling” during the week households were surveyed.
Fratantoni agreed that the latest numbers suggest unemployment is likely to continue to rise.
“The August employment report confirmed that the job market is cooling,” Fratantoni said. “With a 142,000 increase in August and downward revisions of the June and July numbers, job growth has slowed to an average 116,000 over the past three months. That is likely not enough to keep the unemployment rate from rising further.”
Fratantoni said MBA forecasters expect the unemployment rate will increase over the next year, “perhaps getting as high as 5 percent.”
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