NEWS AND INSIGHTS | INSIGHTS

CIO Notebook: U.S. Non-Farm Payrolls Better than Expected but Questions Remain

July 03, 2025
Shannon Saccocia, CFA, Chief Investment Officer - Wealth

The probability for a July rate cut has fallen meaningfully in our view as the threat of higher inflation from tariffs, combined with a labor market that appears on the surface at least to be in equilibrium, gives the Fed the opportunity to wait and learn more for a little bit longer

June non-farm payrolls released today were much stronger than anticipated. While consensus was for a +106k gain, the whisper numbers were skewed much more to the downside, and the +147k print came as quite a surprise to most economists. In addition, prints for April and May -- which were expected to be revised lower -- were instead revised up by a combined +16k, bringing the trailing three-month average to +150k.

While the top line figure was quite strong, the quality of the job gains can certainly be questioned. State and local government hiring increased by +73k in the month, while private payrolls in aggregate were up only +74k – well off the +100k expected. Gains in health care (+39k), leisure and hospitality (+20k), and social assistance (+19k) continued to drive monthly gains. While there was a tick up in construction hiring (+15k), there were declines in other goods producing areas of the economy; manufacturing was lower by -7k. The unemployment rate fell to 4.1% from 4.2% as the labor participation rate fell to 62.3% from 62.4%, continuing its trend lower. In addition, wage growth slowed, as average hourly earnings grew by only +0.2% month-over-month and +3.7% year-over-year. Hours worked fell as well to 34.2 from 34.3 while manufacturing hours worked were steady at 40.1.

As for the Fed, today’s release once again lowered the probability of a Fed rate cut in September to 75%. The probability for a July rate cut also fell, from 25% to essentially zero, as the threat of higher inflation from tariffs, combined with a labor market that appears on the surface at least to be in equilibrium, giving the Fed the opportunity to wait and learn more for a little bit longer. Both President Trump and Treasury Secretary Scott Bessent have in their own ways indicated over the last week that the Fed’s posture is too tight and that there are several viable candidates to fill Chair Jerome Powell’s seat after his term expires in May 2026. Our view is that the probability of a cut in July is higher than zero, but still likely below 30% (at least given the data we have at the time of writing).

In addition to today’s employment data, investors’ eyes are on the U.S. House of Representatives, which stands ready to begin the vote on President Trump’s promised tax legislation, the “One Big Beautiful Bill Act.” The bill was sent back to House Speaker Mike Johnson from the Senate earlier in the week after a tough Senate negotiation which eventually required Vice President JD Vance to cast the deciding vote in favor of passage. Despite pushback on both the size of the bill, the commensurate increase in the budget deficit, and the impact on lower income households via Supplemental Nutrition Assistance Program (SNAP) and Medicaid changes, Speaker Johnson is likely to have the votes to push the bill through to President Trump for his approval ahead of the (admittedly arbitrary) July 4th deadline.

With the tax bill likely inked going into next week, we expect focus to shift to the end of the 90-day delay on the April 2nd reciprocal tariffs; this comes on the heels of announced progress in negotiations with China and Vietnam. The U.S. announced today that it would lift export license requirements for chip design software sales in China, in exchange for a commitment from China to shorten approval times for rare earth metal exports to the U.S. In addition, the U.S. and Vietnam have agreed in principle to tariff changes, with Vietnamese goods now subject to a 20% tariff on goods produced in the country and exported to the U.S. and a 40% tariff on transshipped goods – a nod to the Chinese practice of diverting goods through Vietnam to avoid previously enacted U.S. tariffs. Vietnam also agreed to drop all tariffs on goods imported into the country from the U.S. As we move closer to next week’s deadline, movement in terms of agreements with European Union and/or Japan may become more important, but the likelihood of another delay is, in our minds, high.

In response, risk markets are rallying to begin the holiday shortened session. U.S. stocks are up across the board, with the S&P 500 cresting a new intraday high; small caps are also strong, and the VIX is also lower on the day. Not surprisingly, gold is lower, and Treasury yields across the curve are slightly higher reflecting the lower rate cut probability in July.

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