Nonfarm payrolls: Bad news is bad news

01.  What happened?

Today, the latest U.S. jobs report for July showed an increase of +114,000 versus an expected increase of +175,000, well below expectations. Alongside the latest jobs numbers, downward revisions were made to the previous two months of data, removing a total of -29,000 jobs from their respective periods.

The unemployment rate increased to 4.3% from 4.1% with the number of unemployed persons increasing from 6.8 to 7.2 million. The labor force participation rate inched up slightly from 62.6% to 62.7%, still continuing to remain below pre-pandemic levels of 63.4%. Within the household survey, average hourly earnings came in at +0.2% MoM, lower than last month’s gain of +0.3%. Average hours decreased slightly to 34.2, similar to the prior two months.

Payroll gains were seen across various sectors last month with healthcare seeing the most gains (+55,000), with an average monthly gain of +63,000 in the past year, followed by construction (+25,000) and transportation and warehousing (+14,000). The social assistance industry also gained +9,000 jobs in July. While the government sector showed an increase in the number of jobs (+17,000), the job gains in this sector have been slowing down.

Job losses were seen in Information employment (-20,000). Employment in mining, quarrying, oil and gas extraction registered minor changes along with other industries such as financial activities and leisure and hospitality.

Over a 12-month period, hiring in healthcare has remained consistently high with an average job gain of +63,000 per month on average. 

02.  How did markets react?

Investors reading of today’s jobs reports appeared to be negative as the data reinforced that the U.S. labor market has cooled down considerably more than expected following the streak of strong labor market reports over the past year. At the time of writing, both the S&P 500 and NASDAQ were trading at -2.67% and -4.16% respectively. Yields moved lower across the curve with the 2-Year Treasury moving to 3.96% and the 10-Year Treasury to 3.85%.

Post the weak employment report, Fed Fund Futures increased the probability of a rate cut during the September FOMC meeting which now stands at a 31.5% for a 25bps rate cut and 63% for a 50bps rate cut, increasing the probability of a larger than a quarter basis point rate cut.

03.   What does it mean for investors?

Today’s jobs report showed that the U.S. economy added significantly lesser jobs than expected with downward revisions seen to both the May and June employment numbers (-29,000) and a decrease in average hourly earnings in July compared to June (from 0.3% to 0.2%). Additionally, the unemployment rate sharply increased from 4.1% to 4.3% which, combined with the softer CPI prints, signal that the economy may be appropriately responding to the Fed’s restrictive policy. Looking ahead, the combination of such a high unemployment rate and moderating wage gains makes a good case for the Fed to begin cutting rates imminently starting in September.

Earlier this week, the latest Job Openings and Labor Turnover Survey (JOLTS) reported a decline to 8.18 million jobs in June from 8.23 million jobs in May. Additionally, the ADP private payroll report saw companies add lesser jobs in July (+122,000) compared to June (+150,000).

The jobs report shows that hiring in the U.S. has significantly slowed. Even though better balance has been achieved between supply and demand in the labor market over the past year, any further decline in employment would be of concern as it would increase the risk of an economic downturn. The Fed is highly likely to take measure to reduce such a downside risk and begin pivoting towards a rate cut in September.

The next key data point released will be July’s CPI number (Aug 14th). If the July CPI print comes in softer, similar to the June CPI report, the Fed may finally have enough confidence to deliver a rate cut in September with a high conviction.

Today’s nonfarm payrolls report signals that the labor market has slowed down tremendously and provides enough leverage for the Fed to potentially deliver a rate cut in the September FOMC meeting.