US July Jobs Report Stuns Markets, Fed Rate Hike Odds Slip
US payrolls unexpectedly fell in July, and prior months were revised lower, sharply reducing market odds of a September Fed rate hike.
The U.S. labor market delivered a major surprise in July, with nonfarm payrolls unexpectedly contracting by 23,000 jobs. The Labor Department also revised June's job growth down to a meager 20,000, a sharp downward adjustment from the initially reported 57,000. Economists had forecast a gain of 80,000 jobs for the month.
The unemployment rate ticked down to 4.1% from 4.2%, though this was attributed to a further decline in the labor force participation rate. Average hourly earnings growth also slowed, with the year-over-year increase now trailing inflation, effectively reducing inflation-adjusted incomes for workers.
The surprisingly weak data has significantly shifted expectations for the Federal Reserve's next move. Before the report, markets had priced in a strong chance of a quarter-point rate hike at the September meeting. Following the release, futures markets now show only a 40% probability of a hike, down from 55% prior to the data.
Market reaction was immediate and broad. Stocks rallied, with the Nasdaq composite up 0.8% and the S&P 500 gaining 0.3%. Treasury yields fell sharply, with the policy-sensitive 2-year note dropping 8 basis points to 4.16%. The U.S. dollar index slipped 0.5%, while the yen strengthened to 157.20 per dollar.
Analysts were divided on the implications. Some viewed the report as taking the Fed "off the hiking table," arguing the central bank must now balance its inflation fight against its full employment mandate. Others suggested the weak data could be a "bad news is good news" scenario for stocks, as it reduces the likelihood of aggressive tightening.
However, some cautioned against overreacting to a single month's data, noting that July payrolls tend to be softer and that the weak hospitality reading might reflect temporary effects. The consensus view leans toward the Fed holding rates steady in September, but the debate is far from settled as policymakers weigh cooling job growth against persistent inflation concerns.