Overview: Over the past week, stronger than expected economic data was negative for mortgage markets. Most notably, the closely watched monthly report on job growth and wage gains vastly exceeded the forecasts from economists. As a result, mortgage rates ended the week higher.
In January, the economy added a massive 353,000 jobs, far above the consensus forecast of 180,000 and the most since January 2023. In addition, the results for prior months were revised higher by 126,000. The sectors posting the largest increases included professional services, healthcare, and retail trade. The unemployment rate remained unchanged at 3.7%, below the consensus forecast of 3.8%. Average hourly earnings, an indicator of wage growth, increased 0.6% from December, double the consensus forecast. Earnings were 4.5% higher than a year ago, up from an annual rate of increase of 4.3% last month and the highest level since February 2023.
Without a doubt, this strong labor market data reduces the urgency for the Federal Reserve to loosen monetary policy. Economists estimate that the economy needs to produce roughly just 100,000 jobs per month to keep pace with population growth. In addition, wage growth above 4% generally raises future inflationary pressures. This report, along with recent comments from Fed officials, removed expectations for a reduction in the federal funds rate at the next Fed meeting in March, and investors now anticipate that the first rate cut will not take place until May or June.
Two other significant economic reports released over the past week by the Institute for Supply Management (ISM) also exceeded expectations. The ISM Services Index was 53.4, while the ISM Manufacturing Index was 49.1. Since readings above 50 indicate an expansion in the sector and below 50 indicate a contraction, this data continues to highlight the consumer preference for services over goods over the past year. Also notable, this was the 15th straight month of readings below 50 for the manufacturing sector, the longest streak in about 15 years.
Job Gains (thousands)
Consumer Price Index (CPI)
Retail Sales report