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Another surprisingly strong jobs report sent long-term interest rates soaring Friday on fears that Federal Reserve policymakers will view the 336,000 jobs that employers added in September as justification for another rate hike.

A selloff in long-term bonds briefly sent yields on 10-year Treasurys soaring to new 2023 highs. But yields retreated as investors looked beyond the dramatic jump in payrolls — the biggest since January — and took note that there are still plenty of people looking for work and that wage growth is slowing.

10-year Treasury yields retreat after spiking

Source: Yahoo Finance.

Yields on 10-year Treasury notes, which often signal where mortgage rates are headed next, spiked 17 basis points from Thursday’s close, briefly touching a 16-year high of 4.89 percent after the release of the latest jobs numbers, before retreating below 4.80 percent.

Friday’s nonfarm payrolls report from the U.S. Bureau of Labor Statistics showed employers hired nearly twice as many workers in September as economists had been expecting. But the unemployment rate held at 3.8 percent, and the number of unemployed persons was essentially unchanged at 6.4 million. Annual growth in average hourly earnings also cooled to 4.2 percent, the lowest since December 2020.

Odeta Kushi

“Once you dig below the headline jump in payroll gains, there are signs that employers’ demand for labor has cooled this year, while labor supply has picked up,” First American Deputy Chief Economist Odeta Kushi said in a statement. “Wage growth is moderating and labor participation remains high, which is what the Fed wants to see.”

Pantheon Macroeconomics Chief Economist Ian Shepherdson cautioned that the slowdown in average hourly earnings (AHE) growth “is not sufficient proof for the Fed that wage gains are slowing, because the AHE data are wild and unreliable.”

But Shepherdson said in a note to clients that Pantheon economists expect to see “further softening” in wage growth when the Employment Cost Index (ECI) report for September is released on Oct. 31 — the first day of Fed policymaker’s next two-day meeting.

Fed policymakers voted unanimously on Sept. 20 to keep the central bank’s target for the short-term federal funds rate at 5.25 to 5.5 percent. But the Federal Open Market Committee’s “dot plot” — projections of where policymakers think rates will be in the future — show most committee members thought they’d need to hike rates one more time this year to get inflation under control.

Tuesday’s release of the Bureau of Labor Statistics’ Job Openings and Labor Turnover Survey (JOLTS) report, which showed job openings increased by 690,000 at the end of August, also panicked bond market investors, sending yields on 10-year Treasurys to new highs.

The CME FedWatch Tool, which tracks futures market trades to predict the probability of Fed rate hikes, on Friday calculated the odds of a Nov. 1 rate hike at 29 percent, up from 18 percent a week ago. Futures markets suggest a 43 percent chance of one or more Fed rate hikes by the end of the year.

Even if it’s done hiking rates, the Fed could keep applying the brakes on the economy by continuing to allow $95 billion in Treasurys and mortgage-backed securities roll off its books each month (“quantitative tightening“), and by simply keeping short-term rates where they are next year (the so-called “higher for longer” strategy).

Doug Duncan

“Overall, this report is generally consistent with a ‘higher-for-longer’ monetary policy stance, especially when considering the economic activity reflected in today’s report primarily occurred prior to the recent run-up in rates,” Fannie Mae Chief Economist Doug Duncan said in a statement.

Futures markets are pricing in a 95 percent chance that the Fed will approve at least one rate cut by the end of next year. But the latest dot plot shows that most Fed policymakers don’t anticipate lowering rates by much, if at all, in 2024.

Diane Swonk

“Don’t hold your breath on rate cuts,” KPMG Chief Economist Diane Swonk warned in her analysis of the latest job numbers.

“We still believe the Federal Reserve is done with rate hikes, with the bond market now doing the heavy lifting for the Fed,” Swonk wrote. “However, this data suggests that the even ‘higher for longer’ mantra for the Fed will hold; stronger growth justifies higher rates. The acceleration in growth will also keep the Fed concerned it could backslide on the progress made on inflation.”

Freddie Mac’s weekly surveys show mortgage rates are at the highest level since 2000, with 30-year fixed-rate loans averaging 7.49 percent during the week ending Oct. 4.

Sam Khater

“Several factors, including shifts in inflation, the job market and uncertainty around the Federal Reserve’s next move, are contributing to the highest mortgage rates in a generation,” Freddie Mac Chief Economist Sam Khater said in a statement Thursday. “Unsurprisingly, this is pulling back homebuyer demand.”

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Email Matt Carter

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