Mortgage Rates to Fall Following Weak July Jobs Report

Mortgage rates will fall today following a weaker-than-expected jobs report that increases the odds of a September rate cut.

U.S. employers added 73,000 jobs in July, fewer than the roughly 100,000 expected by forecasters. Almost all of the job creation previously reported for May and June was revised away and the unemployment rate ticked up to 4.2% from 4.1%.

• Of the total 291,000 jobs previously reported as being created in May and June, 89% (258,000) vanished, with the revised data now showing only 33,000 jobs created in those months. This appears to be the largest revision in decades, aside from during the pandemic.
  • Interestingly, in a speech two weeks ago, Governor Waller, one of two Fed officials who dissented on this week’s FOMC decision to favor cutting, highlighted that a consistent pattern of downward revisions in the payroll data leads him to think the labor market is weaker than it seemed at the time.
  • As we noted last month, nearly half of the job creation reported for June appeared to be due to statistical distortion.

• The unemployment rate was expected to increase to 4.2%, but unrounded, it was  4.248%—a hair away from rounding up to 4.3%.
  • The unemployment rate is more important than job creation for the Fed right now because the large recent decline in immigration means less labor supply, meaning the breakeven rate of job creation has declined. Because of this, Chair Powell hinted on Wednesday that an increase in the unemployment rate is a necessary condition for the September rate cut.
  • The unemployment rate is currently still very low by historical standards, but is up from 4.0% in January 2025, 3.7% in January 2024, and 3.5% in January 2023. A lot of the increase in the past 6 months has been driven by a decline in labor force participation, meaning fewer people are choosing to look for work.
• The private sector gained 83,000 jobs in July, as the public sector lost 10,000, but nearly all of the private sector job creation was in healthcare (73,000). There were declines in government (DOGE effects), and sectors that depend on immigrant labor. Manufacturing also declined, but perhaps not as much as expected, given tariffs.
• The six-month average rate of job creation has slowed to 81,000 per month from 175,000 in January and the three month average has slowed to just 35,000 per month, from well over 100,000 per month previously. While a slowdown makes sense, given immigration patterns, the rate feels concerning.

Mortgage rates will fall as odds for a September rate cut increase. But the decline will be limited by uncertainty over the economic data to be released in coming weeks and the fact that the already priced-in rate cuts counted on the jobs data evolving in this way.

• There is one more jobs report and two more rounds of inflation data before the September 17 Fed meeting. The noise in the jobs data over the past couple of years means that today’s signals could easily be reversed in a month. One year ago, a similar jobs report led to a larger-than-usual 50 bps cut at the September 2024 Fed meeting, but subsequent jobs reports made it clear that the initial report had overstated labor market weakness.
• If this labor market weakness persists without a significant enough increase in inflation to demand Fed action, a series of cuts in Q4 seems likely. Two are already priced in before the end of 2026, however, limiting how much mortgage rates can fall without more rate cuts being put on the table.

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