A startling jump in initial unemployment claims and remarks from Federal Reserve Chair Jerome Powell that official data could be overestimating job creation by up to 60,000 jobs a month has mortgage rates tumbling this week.
Yields on 10-year Treasury notes, a useful barometer for mortgage rates, dropped as low as 4.1 percent on Thursday following Wednesday’s Fed rate cut and Thursday’s initial jobless claims report, down from 4.19 percent on Tuesday.
Lender data tracked by Mortgage News Daily showed rates on 30-year fixed-rate mortgages dropping by an equal proportion on Wednesday and Thursday, falling nine basis points over two days to 6.26 percent. A basis point is one hundredth of a percentage point.
Mortgage rates could make another big move next week, when the Labor Department updates payroll and unemployment numbers for October and November on Dec. 16 — a release that could include revisions for previous months. When last updated, that report showed unemployment rising to 4.4 percent in September, with 7.6 million Americans out of work.
Initial jobless claims jumped to a seasonally adjusted 236,000 during the week ending Dec. 6 to the highest level since September, the Department of Labor reported Thursday.
Jobless claims jump
The increase of 44,000 initial jobless claims from the previous week was the biggest increase in raw numbers since July 2021. But economists say that’s in part due to seasonal volatility — the 192,000 initial claims filed during the week ending Nov. 29 was the lowest print of the year.
“The rebound in initial claims to their highest level since Sept. 6, after a similar adjustment-induced plunge in the previous week, suggests that layoffs are starting to creep up,” Pantheon Macroeconomics Chief U.S. Economist Samuel Tombs said in a note to clients Thursday. “But the seasonals struggle even more than usual from Thanksgiving through mid-January, so the trend is far more important than the data for single weeks.”
The four-week moving average showed initial jobless claims were up by 2,000, to 216,750 last week, and WARN Act layoff notices and planned layoffs tracked by Challenger, Gray & Christmas “point to a further incremental rise in claims at the start of next year,” Tombs said.
Job growth overstated?
Bond market investors who fund most mortgages are also taking stock of comments made by Powell after the Fed approved its third rate cut of the year Wednesday.
As Fed policymakers weigh whether inflation or unemployment pose the bigger threat to the economy, they’re keeping a close eye on unemployment and payroll growth.
Powell said that while official estimates from the Bureau of Labor Statistics suggest that employers have been adding an average of 40,000 jobs per month since April, “We think there’s an overstatement in these numbers by about 60,000. So that would be negative 20,000 per month.”
The issue is a statistical model that the Bureau of Labor Statistics uses to estimate how many jobs are created or lost when businesses are started or go out of business.
The birth-death model has consistently overstated estimates of payroll growth, which often have to be revised down. The BLS plans to roll out improved modeling in February.
Payroll growth trending toward negative
According to the official numbers, payrolls have already shrunk twice this year — in June (-13,000) and August (-4,000).
If the Fed’s estimates are correct, payrolls also declined in May and were barely in positive territory in July.
Powell said the Fed’s own estimates that payrolls have shrunk by an average of 20,000 jobs a month since April “could be wrong by 10 or 20 (thousand jobs) in either direction.”
The impact of slower job creation has also been softened by the fact that there are fewer people looking for jobs, he said. Labor supply has “come down quite sharply,” due to lower immigration and labor force participation.
“But I think a world where job creation is negative, I just think we need to watch that situation very carefully and be in a position where we’re not pushing down on job creation with our policy,” Powell said.
As for inflation, it’s also come in “a touch lower” than Fed policymakers had anticipated, with services inflation coming down and goods inflation “entirely in sectors where there are tariffs.”
“A reasonable base case is that the effects of tariffs on inflation will be relatively short-lived — effectively a one-time shift in the price level,” Powell said. “Our obligation is to make sure that a one-time increase in the price level does not become an ongoing inflation problem.”
“But with downside risks to employment having risen in recent months, the balance of risks has shifted,” Powell said, justifying Wednesday’s quarter percentage point cut in the short-term federal funds rate.
Since the Fed doesn’t have direct control over mortgage rates, the question for homebuyers and homeowners who are hoping they’ll keep coming down is whether the economy is in worse shape than indicated by the central bank’s latest forecasts.
In the Summary of Economic Projections released Wednesday, Fed policymakers signaled that they expect to make only one more cut next year and another in 2027.
Futures markets tracked by the CME FedWatch tool show investors on Thursday pricing in a 71 percent chance of two Fed rate cuts next year, with the first coming in April.
Forecasters at Pantheon Macroeconomics continue to expect three Fed rate cuts in 2025 — in March, June and September — as the employment picture continues to deteriorate.
The latest Job Openings and Labor Turnover Summary (JOLTS) report, released on Dec. 9, showed job openings unchanged at 7.7 million in October, with the number of people quitting their jobs (2.9 million) or laid off (1.9 million) also little changed.
Samuel Tombs
But Tombs said there were “a few troubling signs” in that data, including the 1.2 percent layoff rate rising to tie a post-pandemic high, and WARN layoff notices and Challenger data pointing to further increases ahead.
The drop in the private sector quit rates to 2 percent — the lowest level since May 2020 — suggests that businesses that need to cut costs will have to resort to layoffs rather than relying on natural attrition, he said.
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