Does this jobs report kill rate hikes for the rest of 2026?

Oil prices are at $67, the jobs data missed estimates with negative revisions, and mortgage rates are still near yearly highs. So, should the Federal Reserve still be super hawkish after this jobs report?   

Over the past two months, I’ve been focused on why the 10-year yield and mortgage rates might not drop as much as people think, given that the Fed has flipped from two to three rate cuts to two to three rate hikes. However, after this week — with oil prices as low as they are and this jobs report — I believe the Fed hawks will lose their momentum and we should not have any rate hikes in 2026 if the data stays the same.

From BLS: Both total nonfarm payroll employment (+57,000) and the unemployment rate (4.2 percent) changed little in June, the U.S. Bureau of Labor Statistics reported today. Employment continued to trend up in professional and business services, social assistance, and health care. Leisure and hospitality lost jobs.

As we can see in the chart below, the labor data took a big hit in the leisure category, and the prime-age labor force participation rate had the largest one-month drop ever. With the World Cup creating a lot of hiring and firings, the labor data should be very noisy, so we can strip out a lot of that volatility when we look at the rest of the year.

Because we had a big drop in the labor force rate in this report, the unemployment rate fell to 4.2%. Without the labor force rate falling, the unemployment rate, of course, would be much higher. We should see a rebound in the prime age labor force participation rate next month, but in general terms, without much immigration, the labor force has been cooling off.

One of the most critical data lines for a recession, residential construction labor, doesn’t look great right now. When Fed Chair Kevin Warsh said twice in his June Fed press event that policy is too restrictive for housing, this chart and housing starts validates that point. Even Cleveland Fed President Beth Hammack, a hawk, agrees with that.

On top of the jobs report missing estimates, oil prices got close to my $67 target level. If they go below $67, I will be shocked myself, but we are on the verge of my call being wrong. If oil prices head even lower than $67, it will be hard for the Fed hawks who made rising oil prices a reason for rate hikes to stay hawkish. 

Will the Fed continue to be super hawkish after this jobs report? I don’t believe they can be. Some members, like Hammack, would be hawkish even if the last five jobs reports were negative, as long as the unemployment rate was low and jobless claims were in check. Minneapolis Fed President Neil Kashkari, who talked about one rate hike this week, often changes his views, but many of the Fed members who went very hawkish at the June Fed meeting haven’t made their views public since conditions have changed.

I believe the Fed’s break-even is 33,000, meaning they need to see more than 33,000 jobs created per month to keep the unemployment rate low. The last six months on average is 92,000 per month; that is good enough for them on the labor side unless they want to come and say it isn’t. Until that happens, don’t look for the bond market to do it for them just yet.

Conclusion

I know we have some frustrated people in mortgage and real estate — oil prices have collapsed and jobs data missed the estimate, but the 10-year yield is at 4.47% and mortgage rates are near yearly highs. I’ve tried to give a heads-up on why yields might not go down as much if oil crashes, which is what has occurred.

On a positive note, I do believe that with the full data we have, many doves who turned hawkish at the last Fed meeting will tone down their stance now, which could be good for yields and mortgage rates.  After this week, the market has now priced in only one rate hike, and that is now in December, so maybe we avoid a rate hike altogether this year.