The entire economic landscape, including mortgage rates, has changed this week, starting with the Fed’s talking points on Wednesday. The honey badger labor market is still going strong as we received another strong jobs report on Friday which pushed bond yields higher initially. However, the way the day ended showed that change is coming.
We now have a better idea of what Federal Reserve want to do with their Fed rate hikes, and we have a lot of data that shows the economy will be different 12 months from now. It will be important to think ahead to 2023, especially if the labor market does what the Federal Reserve wants it to do, slowing enough to create a job-losing recession.
This week, Fed Chairman Powell explained that the Fed doesn’t want to boost the economy too much, which would then force them to cut rates more quickly. This confirms my belief that many of their aggressive arguments over the past year have been aimed at keeping financial conditions as tight as possible until they hit their neutral fed funds rate.
The Fed did not want mortgage rates to fall or the stock market to recover. Now it looks like a 5% fed funds rate is what they want. Can they get there with a slower hiking pace? We will see. The labor market was one of the two pillars they leaned on for their aggressive rate hikes in 2022, so let’s look at the jobs data today.
Of BLS: Total nonfarm payroll employment increased by 263,000 in November and the unemployment rate remained unchanged at 3.7%, the US Bureau of Labor Statistics reported today. Notable job gains occurred in recreation, hospitality, health care and government. Employment fell in retail trade and transportation, as well as in warehousing.
Below is a breakdown of the education-related unemployment rate for people aged 25 and over. We found a notable drop in the unemployment rate among those who never completed high school, while other educational attainment groups saw their unemployment rate increase slightly.
- Less than a high school diploma: 4.4%%. (previous 6.3%)
- High school graduate and no college: 3.9%
- Some college or associate degrees: 3.2%
- Bachelor’s degree or higher: 2.0%
Remember that the hardest hit in every recession are those without a high school education. This is why we like the economy to have a tighter labor market, so that people of all levels of education can be employed.
On April 7, 2020, I wrote the America is Back recovery model for HousingWire, which I then withdrew on December 9, 2020, as the recovery was strong based on my work. It took some time to recover all the jobs lost due to COVID-19, but nothing like what we experienced after the great financial recession of 2008. In time, we recovered all the jobs we had lost to COVID-19 by September 2022, and job openings were over 10 million.
Now that these jobs have been recovered, we must bear in mind that employment levels are still insufficient because we would have more people working if COVID-19 never happened. So think of it as a catch-up to those job gains. Over time, we will return to our slower, steady job gains if we can avoid a recession. Remember, we had the longest economic and employment expansion in history before COVID-19 hit us with a lightning-fast recovery right after.
Part of the jobs report’s weakness is in areas where we’ve seen headlines of layoffs coming in. As you can see below, layoffs in retail, transportation and warehousing have been discussed in the media, and we are finally seeing these jobs disappear in these sectors.
The unemployment rate is lower than the overall data shows; if you only count people aged 20 and over, the unemployment rate is 3.4% for men and 3.3% for women. We rarely discuss this line of data, but while the Fed mentions the need for higher unemployment, it’s not considering teens first.
Today we saw a fascinating reaction from the bond market after the release of the jobs report. Right after the report, bond yields soared, hurting mortgage rates as rates edged higher. As of this writing, however, bond yields have retraced to higher levels and are down for the day, which is positive for mortgage rates.
When I talked about the Fed Pivot in a recent HousingWire Daily podcast, I mentioned that the bond market would outpace the Federal Reserve Pivot. As always, the Fed will be late in the game.
The Federal Reserve constantly talks about raising rates based on the strength of the labor market. Once the labor market crashes, the Fed’s rhetoric about being aggressive in fighting inflation won’t matter much, because Americans will lose jobs. I think they know that too and at that point the Federal Reserve will pivot its language, but the markets will be well ahead of them. 
Since I now have all six red flags of recession, I watch the jobless claims data first, because once they go up, the job loss recession has begun. It’s something we’ve seen in every cycle of economic expansion to recession.
I recently wrote about what I need to see to avoid the short-term job loss recession. On Thursday, unemployment insurance claims data fell again after rising the previous week to reach 241,000 and are now at 225,000. My crucial level here is 323,000 on the four-week moving average for the Fed pivot, which means something different for everyone.
Overall, it was a good jobs report. Wage growth is a little hot here, but I think we have a few bits in the data that gave it a boost in this report.
Some people are looking at household survey data showing more weakness in labor markets. For these people, at this point in the economic expansion, with all my recessionary red flags, unemployment insurance claims are the most critical line of data we have. In the game of rock, paper and scissors, I would take unemployment insurance claims on employment data and job postings, which fell in the most recent report
A big development this week is that the Fed is telling the public that it is aware of excessive rate hikes. The bond market and mortgage rates have fallen significantly since November’s weaker CPI release: mortgage rates have since fallen 1%.
However, the bond market’s reaction today, even after the better than expected jobs report, is the real story of the week. A few months ago, a good jobs report would have pushed the 10-year yield much higher and it would have closed the day higher, which would be bad for mortgage rates.
Today, however, bond yields ended the day lower; they couldn’t even hold onto the gains after the stronger-than-expected jobs report. This is a very big problem from my point of view. Today’s jobs report and bond market reaction could be an inflection point where the bond market begins to pivot ahead of the Federal Reserve. The question is, when will the Federal Reserve join the party?
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