Rates Take a Breather After Surprisingly Strong Jobs Report

After a few good weeks for interest rates, things hit a bit of a speed bump this week thanks to a stronger-than-expected jobs report.

The week started quietly. There was no important economic news on Monday, but behind the scenes, there was still plenty going on. Big financial firms often need to “rebalance” their investments at the end of a month or quarter—especially if stocks or bonds have gained or lost value. That can mean buying or selling large amounts of bonds all at once, and that kind of movement helped push rates slightly lower by Monday afternoon.

Tuesday brought some early data on the health of the economy. One report showed that the number of job openings rose unexpectedly. That might sound like good news, but when it comes to interest rates, it’s often the opposite. A strong job market can make the Fed less likely to cut rates. So rates moved a bit higher at first, but later in the day, traders calmed down and things leveled off.

Wednesday delivered a report on private-sector hiring, and it showed a surprising drop in jobs. That kind of news usually helps push rates lower, but in this case, it didn’t. Why not? For one thing, this particular report doesn’t always line up with the “official” jobs data that comes out later in the week. Beyond that, traders were already waiting for the bigger jobs report coming on Thursday, so they didn’t want to overreact.

Thursday’s jobs report was the main event—and it came in stronger than expected. That meant more jobs were added, and the unemployment rate moved slightly lower. For interest rates, this was bad news. It suggests the economy may not be slowing down as much as some had hoped, and that makes it harder to justify lower rates in the near future. As a result, rates moved back up after falling for most of the past two weeks.

Here's a longer-term look at the same chart:

Thankfully, the rate market had already begun to cool its jets on Wednesday and mortgage lenders had enough of a cushion to absorb some of Thursday's bond market weakness.  As such, the jobs report reaction only caused a modest additional bump and average mortgage rates remained very close to their recent lows in the bigger picture.  You'd have to go back to October 2024 to see anything appreciably lower.

Even though this week interrupted the recent trend toward lower rates, it doesn’t mean that trend is over. July 15th is on the horizon and with it comes the next CPI report (Consumer Price Index). This is the key inflation data that will offer the best insight yet as to whether tariffs are having an impact on inflation.  If the impact is low, rate cut expectations would likely increase fairly quickly. But if the impact is big and obvious, rates would be more likely to rise.

The parting shot (or parting chart?) shows how ready the market is to react to certain economic reports.  The metric is the expected Fed Funds Rate at the end of the year, per Fed Funds Futures (a security that lets traders bet on future changes in the Fed rate).  As we often discuss, changes in these expectations tend to have a much bigger impact on mortgage rates than actual changes made by the Fed on decision days. Bottom line: more than half of the expectation for another 0.25% rate cut was wiped out in a few minutes after the jobs report.

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