US employers unexpectedly cut 23,000 jobs in July, contrary to expectations of an 80,000 job gain. This weak jobs report, combined with downward revisions totaling 103,000 jobs for May and June, signals a dimming picture for the job market. Despite the job losses, the unemployment rate surprisingly fell to 4.1% from 4.2%, largely due to a decline in the labor force participation rate to 61.4%, its lowest in over five years. Average hourly earnings also saw a modest increase of 3.2%, below the current inflation rate, adding pressure to lower and middle-income consumers.
Wall Street reacted positively to the news, with the S&P 500 rising 0.6% to surpass its previous all-time high. The Dow Jones Industrial Average gained 0.3%, and the Nasdaq composite added 1.3%. This market rally was fueled by investor hopes that the weaker job market data might ease pressure on the Federal Reserve to raise interest rates to combat inflation. Expectations for a rate cut in September have fallen to 44% from 67% a week prior, according to CME FedWatch, though the immediate sentiment shifted towards holding rates steady.
The bond market also reflected this sentiment, with the yield on the 10-year Treasury falling to 4.64% from 4.67% before the jobs report. The two-year Treasury yield, which closely tracks Fed actions, dropped to 4.20% from 4.22%. Analysts like Ellen Zentner from Morgan Stanley Wealth Management suggested the report might delay rate hikes, though inflation data next week, particularly the consumer price index (CPI) expected to show a 3.4% rise in July, will be crucial. Corporate earnings, with S&P 500 companies reporting 50% profit growth, also provided underlying support for the stock market gains.
While the stock market welcomed the implications for interest rates, some experts, such as Peter Graf of Amova Asset Management Americas, cautioned that investors should be wary of the future growth potential of an economy with fewer people working. The Federal Reserve now faces the complex task of balancing job growth with inflation control. A weaker job market could become even more unstable under higher interest rates, as businesses would struggle with increased borrowing costs.
