U.S. job creation exceeds forecasts, signals delays in rate cuts

Job creation that exceeded expectations in May has reinforced the perception that the Federal Reserve will maintain the same benchmark interest rates at its June meeting and may delay any rate cuts that were planned for this year. This means that mortgage rates are likely to be higher for even longer than previously expected. 

The U.S. economy added 272,000 jobs in May, above the market consensus estimate of 180,000. It was also much higher than the 160,000 jobs delivered the previous month (the April data was revised downward by 15,000) and the 12-month average increase of 232,000, per data released Friday by the U.S. Bureau of Labor Statistics.

In May, job gains were most notable in industries such as health care (+68,000), government (+43,000), and leisure and hospitality (+42,000). The data shows that the average hourly earnings for private-sector employees grew by 0.4% month over month to $34.91 and were up 4.1% from a year ago. 

Meanwhile, the unemployment rate was 4% (6.6 million unemployed people) in May, compared to 3.7% (6.1 million unemployed people) in the same month last year. That’s the highest level for the jobless rate since January 2022. 

Following the jobs report, the 10-year U.S. Treasury, which historically correlates to mortgage rates, was at 4.42% on Friday morning, up 13 basis since market open. At HousingWire‘s Mortgage Rates Center, the 30-year fixed for conforming loans was at 7.2%.

The CME FedWatch Tool, which measures the likelihood that the Fed will change the federal target rate at upcoming meetings, on Friday showed a 99.4% chance of rates remaining unchanged at the next meeting, compared to 96.2% yesterday. The chances of a rate cut in September went down from 68.7% to 54.4% in the same period.

“Although this report is not uniformly strong, on net, it is showing a job market that is still quite tight, which likely means that the Federal Reserve will continue to hold at its current level of rates, as inflation is unlikely to drop back to target given this pace of wage growth,” Mike Fratantoni, chief economist for the Mortgage Bankers Association (MBA), said in a statement. 

The MBA forecasts the Fed’s first rate cut in September of this year. Benchmark rates are now between 5.25% and 5.50%.

Lawrence Yun, president of the National Association of Realtors (NAR), said that yearly wage growth of 4.1% is respectable and better than the 3.4% consumer price inflation. But Americans have not shown recognition of an improving economy “due to the fact that the cumulative rise in consumer prices is still higher than the cumulative wage gain of the past four years.” 

“Payroll data is considered much more reliable than household survey data. That is why Wall Street is expecting a further delay in the Fed’s interest rate cut. The mortgage rate looks to be stuck at near 7% average for at least another month,” Yun said in a statement.

Danielle Hale, chief economist at Realtor.com, said this month’s uptick in job creation was “smaller than previous hiring sprees in March 2024 and December 2023.” Overall, the job market “has slowed from previous highs, but appears to be normalizing in a healthy way and should help bolster confidence that monetary policy is having its intended effect.” 

But inflation data is needed to understand the Fed’s next step. 

“Bond traders are anticipating slower growth and lower inflation, which has caused 10-year yields to slide in the last week to lows not seen since late March,” Hale wrote. “If this perspective is confirmed in next week’s data, we could see mortgage rates remain below 7%, a threshold they’ve hovered above and below for the past four weeks, but if the data deviate from this trend, mortgage rates are likely to climb.”  

In an interview with HousingWire earlier this week, Fannie Mae chief economist Doug Duncan said that his team expected new payroll jobs in May to be aligned with April. But he noted that if the figure exceeded 200,000 jobs, “it’s going to take longer for the Fed to act.”

“We have in our forecast [the Fed] cutting 25 basis points for each of the September and December meetings. But if they don’t get three strong months trending the major data in the direction they want, we will take the September number out. The risks, right at the moment, are balanced toward less cuts.” 

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