Labor Market Cools Sharply With July Job Losses, Boosting Hopes for Fed Policy Shift

The chances of a Federal Reserve rate hike in September dropped below 50% after the latest labor market report showed unexpected weakness in U.S. employment.

The U.S. job market weakened for a second consecutive month in July, potentially giving the central bank more flexibility to hold interest rates steady despite inflation remaining above target levels.

The government’s Nonfarm Payrolls report released Friday showed that U.S. employers reduced payrolls by 23,000 jobs in July. The figure fell far short of economists’ expectations for an 80,000 increase and marked a decline from June’s revised gain of 20,000 jobs, which was previously reported at 57,000.

May’s employment figures were also revised lower, with job growth adjusted to 63,000 from the earlier estimate of 129,000.

The latest decline represented the first negative payroll reading since February, when the economy lost 156,000 jobs.

The unemployment rate unexpectedly fell to 4.1%, beating forecasts for 4.2% and improving from June’s 4.2%.

Markets quickly responded to the weaker employment data, with U.S. stock futures rising and Treasury yields moving lower. Safe-haven assets also benefited, with gold gaining 3% and silver increasing nearly 6%. Bitcoin remained relatively stable, trading slightly higher around $65,000.

Additional figures from the report showed that wage growth also came in below expectations. Average hourly earnings increased 0.1% in July, below the projected 0.3% rise and June’s 0.3% growth. Compared with a year earlier, wages increased 3.2%, below forecasts of 3.5% and down from June’s 3.4%.

Before the report was released, traders were uncertain about the Fed’s next move in September. CME FedWatch data showed a 55% probability of a rate hike before the jobs data was published. After the weaker-than-expected report, that expectation slipped to 46%.