July payrolls surprise sharply to the downside
US nonfarm payrolls unexpectedly fell by 23,000 in July, missing market expectations by a wide margin. The report pulled attention back to a labor market that appears to be cooling faster than many traders had been looking for.
The headline was not the only oddity. The unemployment rate fell to 4.1% even as payrolls turned negative.
That apparent contradiction was tied to participation: the labor force participation rate has dropped 0.7 percentage points since the start of the year.
Traders shift focus to next week’s CPI
Odaily, citing Tradersunion, said seasonal factors and the fade of World Cup-related boosts distorted the data, but the report still significantly weakened the Fed’s case for a September rate hike. The next major market focus has shifted to the CPI release due next week.
Thomas Ryan, senior economist at Capital Economics, said the softness has not yet shown up in broader indicators, but it is enough to make Fed officials reassess the health of the labor market and reduce their willingness to tighten policy further in the near term.
Adam Crisafulli, founder of Vital Knowledge, described the report as “extremely ugly.”
Markets price in a lower chance of a September hike
Risk assets moved in the opposite direction of the headline data. Stock futures rose and Treasury yields fell as traders bet the Fed’s hiking cycle may be nearing its end.
According to CME tools, the market-implied probability of a September rate hike dropped quickly to 44% from 55% on Thursday.