Mortgage rates went up after a surprisingly strong jobs report last Friday, but experts say it's the inflation data on Wednesday that will dictate their course.

“A stronger labor market makes one worry about inflation on the horizon, and inflation puts a brake on mortgage rates coming down,” said Gene Ludwig, founder of the Ludwig Institute for Shared Economic Prosperity.

The popular 30-year fixed mortgage rate rose to 7.17% from last week’s 7.03%, reversing a downward trajectory earlier in June.

The uptick came after the May jobs report showed 272,000 new jobs in May, much higher than the 180,000 economists predicted. The unemployment rate barely changed, going from 3.9% to 4%.

Average hourly wages also grew more than expected, rising 0.4% from April to May and 4.1% from a year ago. This outpaces the predicted increases of 0.3% and 3.9%.

Rate cuts seem unlikely

“An unexpected strengthening would reinforce the idea that there is no urgency to cut rates and send Treasury yields higher again,” Citigroup economist Andrew Hollenhorst said in a note.

A strong jobs report usually means the economy is growing, so investors move money from safe investments like Treasury bonds to riskier ones like stocks.

Ten-year Treasury yields, a key benchmark for the 30-year fixed mortgage, rose and are now over 4.45%, after being below 4.3% just last Friday.

“Markets are reversing course” in reaction to the May jobs report, said Chen Zhao, a Redfin researcher. “Traders are expecting that this report virtually eliminates the odds of a July rate cut and decreases the odds of a September one.”

Just days before, the market expected the Fed to cut rates later this year due to weaker economic data.

Manufacturing activity shrank in May to 48.7, which was lower than the expected 49.6 and April's 49.2 level. The number of available jobs in April dropped to 8.06 million, below the revised 8.36 million figure.

In April, there were 1.24 job openings for every unemployed person. This matches pre-pandemic levels, indicating the job market is cooling down.

What it means to homebuyers

“A positive jobs report means that the Fed will be reluctant to cut interest rates and therefore mortgage rates will stay high, pricing many potential buyers out of the market,” said Brett Ryan, senior US economist at Deutsche Bank.

He added that a stronger labor market will bolster demand and keep home prices from falling.

That said, positive wage growth could boost house-buying power, which “may help potential homebuyers in today’s affordability-constrained market,” said Odeta Kushi, deputy chief economist at First American Financial Corporation.

For now, homebuyers should brace for higher mortgage rates and home prices, but the real game-changer will be the CPI data for May.

The upcoming inflation report on Wednesday will be more important for mortgage rates. The Fed focuses heavily on inflation when deciding on interest rates and, by extension, driving mortgage rates.

“Expect more rate volatility ahead as the Fed and investors wait for more conclusive evidence of a return to low, stable and more predictable inflation,” said Orphe Divounguy, senior macroeconomist at Zillow Home Loans.