Expectations for a Federal Reserve interest rate cut in September surged following a surprisingly weak July jobs report. The U.S. economy added just 73,000 jobs in July, significantly below economists' predictions. Even more impactful were the substantial downward revisions to job growth in May and June, cumulatively erasing 258,000 previously reported jobs. This marks the largest two-month downward revision since May 2020 and has led many analysts to conclude the labor market is weakening faster than anticipated.
Before the jobs data release, bond futures traders saw approximately 40% odds of a September rate cut. However, these odds jumped to over 80% immediately after the report, with the CME FedWatch Tool indicating a 79% to 87% probability. Analysts like Leslie Falcone, head of taxable fixed income strategy at UBS Global Wealth Management, now anticipate the Fed will begin cutting rates in September, followed by consecutive cuts totaling about 100 basis points. Ellen Zentner, chief economic strategist for Morgan Stanley Wealth Management, suggested the Fed, previously hesitant, now has a clearer path to a September cut if future data confirms this trend.
The weakening labor market, with a three-month average increase in total payroll employment falling to 35,000 in July (compared to 216,000 in 2023 and 168,000 in 2024), is raising concerns among economists. The unemployment rate also edged up to 4.2% in July. This data, combined with recent firm inflation readings, has led some, like the Economist Intelligence Unit, to suggest a stagflation scenario is becoming real. Strategists are recalibrating their economic outlooks, with some warning of a "reckoning period" for markets as previous assumptions about a robust labor market and trade tensions are being overturned.
