The JOLTS job openings report came out at its lowest level in 3.5 years this morning, showing 7.67 million posted jobs for hire as of the last business day in July. This was materially lower than the June 8.18 million number and the market’s prediction of 8.10 million for July.
The significance of today’s report is that it addresses one of the top concerns of the Federal Reserve, which has been that a surprisingly strong labor market would drive inflation pressures, and this has been one of the primary reasons that Fed has hesitated to begin their rate cuts.
Tomorrow, we will see the ADP estimate of total jobs hired in July with the markets predicting 145,000. On Friday, we will see the official Non-Farm Payroll report for July that is expected to show 160,000 jobs hired in July up from the 114,000 in June.
These reports over the next three days will hopefully show the Fed that the labor market has slowed enough not to be a future inflation driver but has not slowed too much to risk pushing the U.S. into a deeper than needed recession, aka a “hard landing” scenario. This would be the ideal scenario for the stock and bond markets.
The MBS markets are presently about 8-10 basis points better in price than yesterday morning and the yield on the 10-year Treasury bond is currently 3.789% which is about 15 basis points lower than its high yesterday. Below is the graph of the 10-year Treasury bond for the last five trading days.
The Fed’s Rate Cut Timing. The Fed Futures market is presently predicting a 42% chance of a 50 basis point rate cut during the Fed’s meeting later this month. The markets expect a 100% probability that the Fed will do at least a 25 basis point rate cut this month.
The Friday Non-Farm Payroll report will be a key focus of the Fed members, as the previous June report showed only 114,000 jobs hired, shocking the markets and it raised concerns about a hard landing recession scenario. It was likely that the June number was a blip because of severe storms that disrupted power to businesses in the southeast during the same week that the Labor Department did their Non-Farm Payroll survey of businesses.
If Friday’s Non-Farm Payroll report comes out higher than the 160,000 projection, this will increase the pressure on the Fed to only do a 25 basis point cut this month. If this report comes out between 114,000 and 160,000 this would increase the probability of a 50 basis point cut this month. If the report comes out below 114,000 it would likely move a 50 basis point cut scenario to a 100% probability.
Impact on Mortgage Rates. Mortgage interest rates are driven by the MBS market prices which do not move 1:1 or at the same time that Fed Funds rates change. The prices of the MBS market today are based upon investors’ forward-looking views of what they expect will happen in the coming months. So, a 25 basis point Fed cut in September is already built into today’s MBS prices. The markets are predicting a 42% chance of a 50 basis point cut, so if this does not happen, MBS prices should worsen a bit on the day the Fed makes their official announcement. If the Fed were to announce today that they are doing 50 basis points, then MBS prices would rally.
This is all because the markets are currently pricing in a 42% probability of a Fed rate cut. On the day it is announced, it becomes either a zero or a 100% probability and the MBS prices will then adjust. The key point is that if a borrower is waiting for the Fed’s announcement with the expectation that mortgage rates will drop on that day, it is very possible if the Fed announces only a 25 basis point cut that mortgage rates do not drop at all on that day or could even go up. It is simply because the MBS markets are forward looking, and these expected future rate cuts are already built into today’s MBS prices. MBS prices will only go up or down if the actual Fed rate cuts are different than what the markets are predicting.
This Market Update and similar such communications are for informational purposes only and are based on publicly available information. These materials are general communications, which are not impartial, and are provided solely for discussion purposes, and not in connection with any product or service offering. The opinions and views expressed in this Market Update are as of the date of this communication and are subject to change. Any forward-looking views and statements contained in this Market Update are based on current estimates or expectations of future events or results. Actual results may differ materially from those described in this Market Update. The views expressed in this communication should not be attributed to Guild Mortgage Company as a whole and may not be reflected in the strategies and products offered by Guild Mortgage Company.
