Jobs Data Gives The Fed More Reason to Hike

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Jobs Report Blows Expectations Out of the Water

The week started with labor data that looked pretty much like more of the same. Job openings rose slightly to 7.27 million in July, just below the 7.31 million expected, while hiring actually fell to 5.1 million. ADP was similarly uneventful, with private employers adding 38,000 jobs in August, versus 47,000 expected. Both reports continued to paint a picture of a labor market that wasn't collapsing, but certainly wasn't booming either.

Then Friday's jobs report blew expectations out of the water. The economy added 162,000 jobs in August, more than triple the 53,000 expected, while unemployment held steady at 4.1%. June and July were also revised higher. For anyone hoping for lower mortgage rates, this was not the report we wanted to see. Treasury yields jumped immediately after the release, taking mortgage rates higher with them.

There is one pretty big asterisk. Nearly three-quarters of August's job growth came from just three areas: restaurants and bars added 59,000 jobs, local government education added 42,000 and manufacturing added 16,000. The restaurant number is especially interesting because it's nearly five times the sector's average monthly gain over the prior year. Some economists believe World Cup-related seasonal distortions may have made that number look stronger than it really was. The World Cup ended in July, so this isn't necessarily 59,000 people suddenly getting hired because of soccer in August. It may be the delayed impact of unusual summer hiring patterns and seasonal adjustments. We'll see whether future reports and revisions confirm that strength or give some of it back.

For now, though, the Fed has to take the report at face value. A strong labor market gives policymakers more room to focus on inflation, and markets moved closer to expecting a rate hike at next week's Fed meeting. As of now, traders are pricing in a 60.6% chance of a quarter-point hike. This week's inflation reports could still change that, but after Friday's jobs surprise, a hike is once again the favorite.

Oil Prices Surge Again

As if the jobs report wasn't bad enough for rates, oil prices surged again over the weekend as fighting between the U.S. and Iran intensified. Brent crude jumped about 8% last week and is now around $94 per barrel, while WTI climbed above $92, both hitting six-week highs. Traffic through the Strait of Hormuz has fallen sharply and attacks are now spreading to tankers and energy infrastructure across the region, raising fears of an even larger supply disruption. Higher oil prices eventually show up in gasoline, transportation and the cost of goods throughout the economy, making the Fed's inflation problem even harder. With Friday's jobs report already showing a much stronger labor market than expected, surging energy prices add another reason for the Fed to keep policy tight and potentially raise rates next week. For mortgage rates, it's a pretty ugly combination: strong jobs and rising inflation pressure at the exact same time.

What to expect this week?

This week is really about inflation. After last week’s surprisingly strong jobs report and the renewed surge in oil prices, PPI on Thursday and CPI on Friday are the two reports that matter most for mortgage rates heading into next week’s Fed meeting.

Tuesday: Small-business optimism and consumer credit. Neither should have much impact on rates. 

Wednesday: No major economic reports.

Thursday: PPI is the first one to watch. Producer prices are expected to rise 0.4% in August, with annual PPI jumping to 5.3% from 4.7%. Weekly jobless claims and existing-home sales also come out, but inflation will dominate the market reaction.

Friday: CPI is the biggest report of the week. Consumer prices are expected to rise 0.4% for the month, with annual inflation holding at 3.4%. Consumer sentiment and the monthly Treasury balance also come out, but after last week’s strong labor data, CPI could be the final major piece that determines whether the Fed raises rates next week.