This print increased expectations for Fed rate cuts (over 80% probability in September, 100% for October), making upcoming inflation data and the Fed’s Jackson Hole event later this month even more critical for policy direction
July non-farm payrolls released today were at the low end of a wide range, posting a gain of +73k compared with +104k consensus coming into this morning. The print broke the trend of five previous months in which non-farm payrolls were better-than-expected. However, more concerning were the sharp downward revisions for May and June. May’s total fell by -125k while June was revised lower by -133k, bringing the trailing three-month average for job gains to only +35k – the lowest since 2020 and well off the +150k pace previously reported in June.
The details of the report did little to disrupt the narrative of a slowing labor market. The bulk of the gains came in heath care and social assistance hiring (+73k) while previously strong leisure and hospitality added only +5k in July. Retail (+16k) and financial services (+15k) posted gains, but manufacturing (-11k) and government jobs (-10k) were negative. Despite the lackluster payrolls, average wages rose by +0.3% month-over-month or +3.9% year-over-year; average hours worked rose slightly to 34.3.
Cited as an area of focus in Federal Reserve Chair Jerome Powell’s comments on Wednesday, the unemployment rate ticked back up to its May level of 4.2%, even as the labor participation rate continues to fall. Standing at 62.2% as of the end of July, labor participation is now down by -0.5% in 2025 – a worrying sign for a Fed looking to deliver on its mandate of maximum employment. There is also evidence in the data that immigration has fallen off meaningfully over the course of 2025, with a decline of -1.7 million foreign born workers since March.
Today’s release sharply reversed the move higher in yields following the Fed meeting on Wednesday, and odds for an interest rate cut have moved north of 80% for September and back to 100% for October. The data also may provide some cover for Fed Governors Christopher Waller and Michelle Bowman, who cited the risk of deterioration in the labor market as justification for their dissents in Wednesday’s meeting. With today’s job print, the two additional inflation readings ahead of the September meeting become even more pivotal and shine a stronger light on Jackson Hole later this month. Not surprisingly, Treasuries are rallying on today’s news, as yields move lower across the curve.
U.S. equity markets opened lower as the jobs data is inciting fear that tariffs and other sources of political uncertainty are weighing more heavily on economic growth than previously thought. In addition, President Donald Trump signed a new executive order today that levies a new round of “reciprocal” tariffs across a broad swath of countries, with currency markets in countries such as Canada, South Africa, and Switzerland reacting negatively to the announcements. While some progress has been made over the past 48 hours with Malaysia, South Korea, and Mexico, the threat of continued escalation is likely to remain a source of concern for markets in the coming weeks.
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