Friday’s strong jobs report renews worries that the Federal Reserve is not done hiking rates to combat inflation as policymakers face June 14 decision to “hike, skip or pause.”

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Mortgage rates retreated from 2023 highs this week as a last-minute debt ceiling deal averted a crisis, but could quickly rebound on a strong jobs report Friday that’s renewed worries about inflation.

The Optimal Blue Mortgage Market Indices show that rates on 30-year fixed-rate conforming mortgages have retreated a 2023 high of 6.85 percent seen on May 26, falling by 20 basis points to 6.65 percent on Thursday.

Mortgage rates retreat from 2023 highs

Thursday’s Senate 63-36 vote to approve The Fiscal Responsibility Act of 2023, which sailed through the House Wednesday on a 314-117 vote, averts a U.S. debt default that could have sent mortgage rates soaring above 8 percent. The legislation suspends the debt limit until Jan. 1, 2025, in exchange for two-year caps on non-military discretionary spending.

Fitch Ratings had placed mortgage giants Fannie Mae and Freddie Mac on rating watch negative on May 25, citing the U.S. government’s “direct financial support” of the mortgage giants. While a debt ceiling deal seemingly resolves that issue, for now, Optimal Blue data shows rates for jumbo mortgages that exceed Fannie Mae and Freddie Mac’s $727,200 conforming loan limit continue to climb.

Treasury yields rebound on jobs report


Source: Yahoo Finance

Yields on 10-year Treasury notes — a bellwether for mortgage rates — were climbing Friday after the Labor Department released the latest jobs report showing nonfarm payroll employment grew by 339,000 in May, exceeding many economists’ expectations and marking 29 consecutive months of positive job growth.

Although the unemployment rate rose by 0.3 percentage points to 3.7 percent, the strong jobs report will fuel the debate that inflation hawks will win out when Federal Reserve policymakers meet on June 14 to decide whether to “hike, skip or pause” a campaign to raise interest rates that began last year.

Before the latest jobs numbers came out, Federal Reserve Gov. Philip Jefferson and Philadelphia Federal Reserve President Patrick Harker said Wednesday they were in favor of skipping a rate hike in June to digest more data but not pausing altogether.

The CME FedWatch Tool, which monitors futures markets to gauge investor sentiment of the Fed’s next moves, on Friday put the odds of a Fed rate hike on June 14 at 36 percent, down from 64 percent last week.

Mark Palim

Fannie Mae Deputy Chief Economist Mark Palim noted that because wage growth remains strong — average hourly earnings grew by 4.3 percent year over year in May— means that even if the Fed skips raising rates in June that doesn’t mean it’s done.

“As in prior months, these wage growth figures continue to suggest that the Fed’s monetary policy tightening has still not significantly slowed the labor market, which, when combined with the hawkish shift in Federal Open Market Committee member language since the May meeting, we believe raises the potential for further rate increases this year,” Palim said in a statement.

Analysts at Fitch Ratings said today that it will take some time for the U.S. to repair the damage done by the last-minute debt ceiling deal and they plan to leave the U.S.’s AAA debt rating on “negative watch” until the third quarter.

“Reaching an agreement despite heated political partisanship while reducing fiscal deficits modestly over the next two years are positive considerations,” Fitch analysts said in a statement. “However, Fitch believes that repeated political standoffs around the debt-limit and last-minute suspensions before the x-date (when the Treasury’s cash position and extraordinary measures are exhausted) lowers confidence in governance on fiscal and debt matters.”

Fitch analysts said their decision to lift the negative watch on the U.S.’s AAA rating will depend on the “coherence and credibility of policymaking, as well as the expected medium-term fiscal and debt trajectories.”

Fitch analysts complained that there has been “a steady deterioration in governance over the last 15 years, with increased political polarization and partisanship as witnessed by the contested 2020 election, repeated brinkmanship over the debt limit and failure to tackle fiscal challenges from growing mandatory spending has led to rising fiscal deficits and debt burden.”

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Email Matt Carter

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