U.S. Labor Market Weakens as July Payrolls Drop by 23,000, Challenging Fed Rate Outlook

The probability of the Federal Reserve raising interest rates at its September meeting fell below 50% following the release of the weaker-than-expected jobs data.

The U.S. labor market weakened for a second straight month in July, potentially giving the Federal Reserve more flexibility to keep rates unchanged despite inflation remaining elevated.

The government’s Nonfarm Payrolls report released Friday showed that the U.S. economy lost 23,000 jobs in July. The figure significantly missed economists’ expectations for an 80,000-job increase and followed June’s revised gain of 20,000 jobs, down from the initially reported 57,000.

Job growth in May was also revised lower, with payroll gains adjusted to 63,000 from the previously reported 129,000.

The last time the U.S. recorded a monthly job decline was in February, when payrolls fell by 156,000.

The unemployment rate improved slightly to 4.1%, beating forecasts of 4.2% and matching the previous month’s revised level.

Financial markets reacted quickly, with U.S. stock futures moving higher and Treasury yields declining. Precious metals also gained momentum, with gold rising 3% on the day and silver climbing nearly 6%. Crypto markets saw limited movement, with Bitcoin trading slightly higher near $65,000.

Additional employment data showed wage growth also came in below expectations. Average hourly earnings increased just 0.1% in July, compared with forecasts for a 0.3% rise and June’s 0.3% gain. On an annual basis, wages grew 3.2%, below expectations of 3.5% and down from June’s 3.4% increase.

Before the report was released, markets were divided over whether the Fed would raise rates at its September meeting. CME FedWatch data showed traders had priced in a 55% probability of a rate hike before the jobs data. After the weaker payroll numbers were released, those odds dropped to 46%.