The U.S. added a disappointing 57,000 jobs in June, significantly below the consensus forecast of 110,000 and May's revised 129,000 gain. This weaker-than-expected jobs report, coupled with a drop in the unemployment rate to 4.2% (from 4.3% in May) due to a decline in the labor force participation rate, has muddied the outlook for Federal Reserve interest rate hikes. Prior to this report, market participants had been pricing in a rate cut or two by the Federal Reserve before the end of the year, with roughly half of the central bank's monetary policy committee predicting this during their last meeting.
Adding to the dovish sentiment are falling oil prices, driven by constructive U.S.-Iran diplomatic talks in Doha. Gasoline prices dropped by approximately 11.5% from mid-May through June 30, reducing headline inflation concerns without requiring Fed action. This gives the Fed two independent reasons to hold rates in July rather than hiking, as acknowledged by Fed Chair Kevin Warsh, who stated that inflation risks have diminished while refusing to offer forward guidance.
As a result of these developments, market expectations for a Federal Reserve rate hike have significantly shifted. According to CME FedWatch, the probability of one or more rate hikes by September dropped from about 65% yesterday to 50% following the report. U.S. stocks, especially Nasdaq 100 futures, saw gains, and the 10-year Treasury yield dipped four basis points to 4.46% as bond markets rallied on the decreased likelihood of aggressive tightening. Analysts suggest the Fed may take a wait-and-see approach, focusing on upcoming inflation data.
