It may have been a shorter week than normal due to the holiday, but it was no less important with several economic reports adding to the case for rate cuts.

The first week of any given month typically hosts the same group of economic reports.  Several of these have a strong track record of causing volatility for rates.  Friday's jobs report is the perennial top dog, but the impact on rates depends on how far the results fall from forecasts.

In the current case, the job count was actually right in line with forecasts (a hair higher, actually).  That would normally be bad for rates, but there were several offsetting factors.  Chief among these were the large downward revisions to the job count (officially "nonfarm payrolls") from the past two reports. 

It may not look like much on a chart, but this change is enough to make the recent trend look more like a labor market that's cooling off as opposed to one that's displaying mysterious resilience.  In addition to the headline job count, the unemployment rate also ticked higher, nearly reaching a level that some economists consider to be high-probability evidence of a recession.

To understand why economists might view this sort of parabolic bottoming to be an excellent indicator of trouble ahead, just consider what typically happens next (visualized in the following chart).

Of course the jobs report is only one piece of data and the unemployment rate is only one component.  Moreover, one could argue that if any moment in economic history has a chance to buck longer-term trends, the past 2 years are high on the list.  But that's why we look at other economic data too!

Of the week's other reports, the service sector index from ISM has the strongest track record of getting the market's attention.  Not only was that true this time, but ISM actually had just as big of an impact as Friday's jobs report.  

ISM doesn't usually hit nearly as hard as the jobs report, but this anomaly was fairly easy to reconcile with this particular ISM report being exceptionally weak.  In fact, if we throw out the initial covid lockdowns, this was the weakest ISM Services report since the Great Financial Crisis recession.

Taken together, both ISM and the jobs report painted a picture of an economy that is showing more conclusive signs of a slowdown.  This is one of the things the Fed wants to see in order to feel more confident about rate cuts.  As such, financial markets adjusted yields accordingly, erasing the rate spike that began last Friday.

"Yield" is another term for "rate."  When bond yields fall, so do mortgage rates.  The same was true this week, but many headlines disagreed because they were based on Freddie Mac's weekly rate survey.  Freddie's methodology meant that last week's rate spike wasn't counted until the present week.  Moreover, Friday's improvement won't be counted until next week.  The daily tracking from Mortgage News Daily shows the real story.

As for Fed Funds Rate expectations, there was certainly a response, but it wasn't nearly as big as the response seen to the last jobs report and the subsequent Consumer Price Index (CPI).

Part of that has to do with the outright level of expectations being just below 5% for the end of the year.  That means the market sees at least one and possibly two rate cuts.  It would be a big deal for traders to bet on much more than that without confirmation from another rate-friendly CPI report.

With that in mind, the next release of monthly CPI data will be this coming Thursday morning!  As always, keep in mind that there is no way to know which side of the consensus will win, only that a big difference between reality and forecasts will almost certainly produce a big move.