Mortgage Rates Are Caught Between a Weaker Job Market and Higher Oil Prices

Mortgage rates finally received some encouraging economic news Friday. Then the weekend reminded us why predicting rates from one economic report rarely works.

The July employment report showed the U.S. economy losing 23,000 nonfarm jobs. Even more importantly, the previous two months were revised lower by a combined 103,000 jobs. The unemployment rate remained relatively low at 4.1%, but labor-force participation has declined since the beginning of the year. In other words, the labor market is not collapsing, but it is clearly losing momentum. (bls.gov)

Bond markets liked the news. Mortgage News Daily’s national 30-year fixed-rate index finished Friday at approximately 6.74%, down from 6.82% at the beginning of the week. (mortgagenewsdaily.com)

That might sound like the beginning of a clean move toward lower mortgage rates. Not so fast.

By Monday morning, renewed uncertainty surrounding the Strait of Hormuz was pushing oil sharply higher again. Brent crude climbed roughly 3% to around $86 per barrel as Iran indicated that reopening the Strait would depend on additional concessions from the United States. The 10-year Treasury yield simultaneously moved about three basis points higher to roughly 4.69%. (reuters.com)

Mortgage-backed securities also weakened, and the Mortgage News Daily 30-year index edged back up to approximately 6.76%. (mortgagenewsdaily.com)

That is only a small move, but the reason behind it matters. Oil is not just something we pay attention to at the gas pump. A sustained increase in energy prices can feed into transportation, manufacturing, food distribution, airfare and countless other costs throughout the economy. That creates an inflation problem, and inflation is precisely what the bond market—and therefore mortgage rates—does not want to see.

The Federal Reserve is now staring at competing signals. On one side, employment is weakening. On the other, inflation remains above the Fed’s 2% objective and geopolitical events continue creating energy-price risk.

At its July 29 meeting, the Federal Reserve kept its target rate at 3.50%–3.75%. What was particularly interesting was that three members voted for a quarter-point increase rather than a hold. (federalreserve.gov)

That is important context. A weaker jobs report makes additional Fed tightening less attractive, but it does not automatically erase the inflation problem. Mortgage rates also do not wait for the Federal Reserve to announce a decision. Treasury and mortgage-backed-security markets continuously trade what investors believe the Fed will eventually need to do.

The next major piece of the puzzle arrives Wednesday with July’s Consumer Price Index. Economists surveyed by Reuters expect headline CPI to increase approximately 3.4% from a year earlier, compared with 3.5% previously. (reuters.com)

A softer-than-expected inflation report combined with Friday’s weaker employment data could reinforce the case that economic pressure is easing. A hotter number could do exactly the opposite.

There is another complication Wednesday: Treasury supply. The Treasury Department is selling $125 billion of new 3-, 10- and 30-year securities this week. That includes a $42 billion 10-year Treasury auction Wednesday afternoon and a $25 billion 30-year auction Thursday. (home.treasury.gov)

When investors are asked to absorb a lot of new Treasury debt, demand matters. Weak demand can require higher yields to attract buyers, and higher Treasury yields can create pressure on mortgage rates.

One of the less obvious stories affecting U.S. rates is happening thousands of miles away. Japan has been dealing with an unusually weak yen, while attention has also turned to the Federal Reserve’s FIMA repo facility.

FIMA allows approved foreign monetary authorities to temporarily obtain dollars using Treasury securities as collateral instead of selling those Treasuries into the open market. That matters because large forced Treasury sales could put upward pressure on U.S. yields. (federalreserve.gov)

The Bank of Japan is simultaneously becoming more concerned about inflation. A summary released Monday showed several policymakers arguing that interest rates may need to rise faster than previously expected. (reuters.com)

This does not mean Japanese monetary policy is suddenly controlling American mortgages. It does mean today’s mortgage market is connected to a much larger global bond market.

For homebuyers, Friday’s employment report was encouraging. Monday’s market is simply a reminder not to extrapolate one good day into a trend. Mortgage rates are currently being pulled in two directions: slower employment growth argues for lower rates, while persistent inflation, higher oil prices, Treasury supply and geopolitical uncertainty argue for higher rates.

Neither side has won.

For someone buying a home, trying to perfectly time mortgage rates probably is not the right strategy. Instead, determine whether the home and payment work at today’s numbers. Then structure the financing so that a future improvement in rates becomes an opportunity rather than a requirement.

I’ll be watching Wednesday’s CPI report, the Treasury auctions and developments in the oil market closely. Those three things could tell us a lot more about where mortgage rates go next than any prediction about what the Federal Reserve might do several weeks from now.