The number of jobs in the U.S. fell in July, contrary to market expectations. What will happen to interest rates?

Contrary to market expectations, U.S. non-farm payrolls fell by 23,000 in July, according to the U.S. Bureau of Labor Statistics. Analysts had expected an increase of about 80,000 or even 83,000. By comparison, the economy added 57,000 jobs in June.

The unemployment rate fell to 4.1%, while the consensus forecast had predicted it would remain unchanged from June’s figure at 4.2%. But the explanation lies in the smaller number of people in the labor market: the labor force participation rate fell to its lowest level since February 2021, Bloomberg notes.

Futures on major U.S. stock indices extended their gains following the release. S&P 500 futures jumped 0.5%, while Nasdaq Composite futures rose 1.1% immediately. Treasury bonds rose in price: the yield on two-year notes fell by about 8 basis points to 4.17%.

Investors are monitoring the state of the labor market for clues about the future policy of the U.S. Federal Reserve, for which maintaining employment is one of its two main objectives—along with ensuring price stability. In recent days, the data has been mixed, notes The Wall Street Journal. The number of initial claims for unemployment benefits in the U.S. rose slightly last week, and a report from ADP, a company that processes payroll data, showed that private employers in the U.S. hired fewer workers than expected in July.

Disappointing employment data could trigger a more significant shift in expectations toward Fed policy easing than before, Freedom Broker noted in its daily review. If the labor market report comes in weaker than expected, it will provide support for bonds and “growth” stocks, analysts wrote.

Prior to Friday’s release, traders had estimated the probability of a rate hike as early as the upcoming September Fed meeting at nearly 55%, according to data from the CME FedWatch market expectations tracking tool . Immediately after the release, that probability dropped to 42%. However, the market continues to fully price in a single 0.25 percentage point rate hike by December.

According to Financial Times sources familiar with Federal Reserve Chair Kevin Warsh’s position, he would be prepared to raise interest rates in September if the inflation figures to be released next week turn out to be high, and markets reinforce expectations of tighter monetary policy.

“This report shows that the labor market is weaker than expected at the beginning of the year. Seasonal factors appear to have played a role. But the overall trend points to a much more pronounced slowdown. If the data over the next couple of months turns out to be somewhat weaker—especially on inflation—the Fed will likely hold off on raising rates,” said Stephanie Roth, chief economist at Wolfe Research, in an interview with Bloomberg.

"If you look closely at the details of the report, it becomes clear that the labor market was not nearly as stable as it seemed. “This release reinforces our view that the Fed will most likely keep rates unchanged for now, unless inflation starts to pick up again,” agrees Ira Jersey of Bloomberg Intelligence.

This article was AI-translated and verified by a human editor