The U.S. July nonfarm payrolls report came in way weaker than expected, potentially marking a turning point for Federal Reserve policy. Only 73K jobs were added—far below forecasts of 110K and the slowest pace since October 2023. On top of that, May and June numbers were revised down by a whopping 258K jobs, a much bigger revision than usual.
Source: Bureau of Labor Statistics
Markets reacted quickly. Traders boosted the odds of a 25-basis-point Fed rate cut in September from 40% to over 80%, and are now fully pricing in two cuts by year-end.
U.S. Economy Looks Resilient on the Surface, But Cracks Are Appearing
The Q2 GDP numbers released earlier painted a mixed picture: inflation-adjusted GDP grew 3% annualized, bouncing back from a weak 0.5% in Q1. But the headline strength was mostly driven by net exports, which contributed 5 percentage points to growth. That was thanks to a sharp 23% drop in imports, reversing the Q1 “frontloading” effect when companies rushed to import goods ahead of potential tariffs. Exports slipped just 2.5%, so net exports turned into a key growth engine.
Beneath the surface, though, domestic demand was soft. Consumer spending, which makes up about two-thirds of the U.S. economy, grew just 1.4%, marking the second consecutive quarter of weak growth. Business investment also slowed. A cleaner measure of private demand—final sales to private domestic purchasers—grew just 1.2%, the weakest since late 2022.
Market reactions were mixed. The 10-year Treasury yield rose about 3bps to 4.35%, suggesting investors are cautious about future growth. While the headline GDP looked strong, weak internal demand and fading investment momentum point to potential slowdown risks in the second half of the year.
Labor Market Weakness Spurs Fresh Rate-Cut Bets
The July jobs report confirmed that the U.S. labor market is cooling quickly. The 7.3K headline gain was the worst since the 2020 COVID shock. Even more concerning, the last three months’ average job gain is now just 35K —the weakest run since the pandemic.
Unemployment ticked up from 4.1% to 4.2%, and the labor force participation rate fell again. That’s two straight months of shrinking labor supply—a sign not just of a slowdown, but genuine weakness in the jobs market.
This data shook market expectations. According to the CME FedWatch Tool, traders now see over an 80% chance of a rate cut in September, compared to just 40% before the data. Short-term bond yields fell sharply, as investors rapidly repriced for a looser Fed. That’s a sharp turnaround from just a few days ago, when Fed Chair Powell’s hawkish comments after the FOMC meeting led markets to expect only one rate cut this year.
Source: CME, FedWatch
Fed’s Balancing Act: Slowing Jobs vs. Sticky Wages
One wrinkle: average hourly earnings rose 3.9% YoY, the fastest pace since March. That keeps the inflation risk on the radar. But most analysts believe softening jobs data outweighs wage pressures, especially with unemployment rising.
Powell has repeatedly said the Fed is watching the labor market closely. And now with unemployment rising and participation falling, the conditions are starting to match his recent warnings of "downside risks" to jobs.
Notably, Nick Timiraos, often seen as a Fed insider at The Wall Street Journal, noted after the report that the Fed may actively consider cutting rates at the September meeting—especially after Powell mentioned labor market risks six times during last week’s press conference. July’s report seems to validate those concerns.
Markets React: Dollar Tumbles, Gold and Non-Dollar Assets Surge
Markets moved fast after the data. The U.S. Dollar Index $BETASHARES US DOLLAR ETF(USD.AU)$ plunged, falling below 99 and wiping out all the gains from earlier in the week. That’s a clear sign the 100 level remains a major resistance, especially with rate cuts back in play.
Source: TradingView
Gold $ETFS Physical Gold(GOLD.AU)$ spiked $38 within 15 minutes, hitting $2,365/oz—a major move. Other currencies rallied too, GBP/USD jumped over 70 pips, EUR/USD surged 90+ pips, USD/JPY plunged 110 pips. This reflects broad dollar weakness and renewed demand for rate-sensitive assets.
Invesight Viewpoint
The weak July jobs report, combined with sharp downward revisions for previous months, confirms that the U.S. labor market is not just cooling—it may be cracking. This could be the trigger the Fed needs to shift gears.
Yes, Q2 GDP looked strong on paper, but it was propped up by one-off trade effects. The real economy—consumer spending, business investment, labor supply—is flashing warning signs.
With unemployment rising to 4.2%, participation falling, and consumption growth at post-COVID lows, the stage is set for a policy pivot. Markets are now bracing for not just one but two rate cuts this year.
The Fed’s next move will hinge on upcoming inflation and labor data, but there’s no doubt: July’s jobs report has tilted the scales, opening the door for easing sooner rather than later. Buckle up—more volatility could be ahead.
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