Job Gains Fall Short

Mortgage rates continued to see a bit of volatility this week, reacting to changing oil prices and ongoing tensions in the Middle East. However, the biggest driver came at the end of the week, when weaker than expected labor market data pushed mortgage rates lower.

Wage growth also came in softer than expected. Average hourly earnings increased by just 0.1% for the month, far below the consensus forecast. On an annual basis, wages rose 3.2%, down from 3.4% the previous month and the slowest pace since May 2021. The unemployment rate unexpectedly declined to 4.1% from 4.2%, but the improvement was not entirely encouraging. The drop was largely driven by people leaving the labor force rather than stronger hiring, with the participation rate (the percentage of working-age people in the labor force) falling to the lowest level since March 2021.

We also received two closely watched reports on business activity from the Institute for Supply Management (ISM). The services sector continued to expand, though at a slightly slower pace than expected, while manufacturing posted its strongest reading since May 2022. Both sectors remain in expansion territory, suggesting businesses are still growing despite economic headwinds. Shifting consumer preferences and higher tariffs on imported goods have helped domestic manufacturers narrow the performance gap with service firms over the last few years.

Bottom Line: Investors are continuing to weigh a mix of slowing economic data, stubborn inflation, and global uncertainty. While inflation has cooled from its peak, it's still above the Federal Reserve's target, which is likely to keep policymakers cautious. As a result, mortgage rates will probably remain volatile from day to day as investors react to Fed comments, economic data, and geopolitical events.

Looking ahead, attention will remain fixed on the conflict in the Middle East and the proposed deal to ease tensions. Investors also will monitor comments from Fed officials about future monetary policy. For economic data, Existing Home Sales will come out on Tuesday. The Consumer Price Index (CPI), a widely followed monthly inflation indicator that looks at the price changes for a broad range of goods and services, will be released on Wednesday. The Producer Price Index (PPI), another monthly inflation indicator, will come out on Thursday. Retail Sales will be released on Friday.