The US labour market cooled more than expected in July, adding 114,000 jobs as the unemployment rate rose, prompting traders to increase bets on the Federal Reserve cutting interest rates this year.
Friday’s figure from the Bureau of Labor Statistics was well below economists’ expectations for 175,000 new positions, and the downwardly revised 179,000 jobs added the previous month.
It was also far lower than the average monthly gain of 215,000 over the previous 12 months. The unemployment rate rose to 4.3 per cent, the fourth consecutive monthly increase.
Treasury yields and stocks tumbled following the data release.
Traders in the futures market dramatically increased bets on interest rate cuts, pricing in more than a full percentage point reduction this year.
That compares with just over 0.75 percentage points before the report. It also implies one or possibly two half-point cuts this year, given that the Fed only has three meetings left before January.
However, Fed chair Jay Powell said on Wednesday that a larger move “was not something we’re thinking about right now”.
Austan Goolsbee, Chicago Fed president and alternate voting member on the Fed’s policy-setting committee, cautioned that the central bank would “never want to overreact to one month’s data”, in a Friday interview on Bloomberg TV. However, “if unemployment is going to go up higher than 4.1 per cent, that’s the kind of thing the Fed has to respond to”, he said.
The two-year Treasury yield, which moves with interest rate expectations, traded below 4 per cent for the first time since May 2023. It was down 0.28 percentage points to 3.89 per cent in late afternoon trading.
Following the jobs report, JPMorgan and Citi analysts raised their estimates for rate cuts this year to the equivalent of five quarter-point reductions. This would mean two half-point cuts and one quarter-point over the next three meetings.
The S&P 500 recovered some of its early decline to close 1.8 per cent lower, while the Nasdaq Composite dropped 2.4 per cent. The Russell 2000, which comprises small-cap stocks that are relatively more sensitive to conditions in the domestic economy, tumbled 3.5 per cent.
The data came as a global stock sell-off gathered pace on Friday, prompted by growing concerns about a US economic slowdown after lacklustre results from consumer and tech companies this week.
“There is a lot more weakness in this report than any sort of strength that we can point to,” said Derek Tang, an economist at research firm LH Meyer.
Ryan Sweet, chief US economist at Oxford Economics, added: “[The reading is] disappointing, but I don’t think we want to get too high or too low on the labour market based on a single month.”
On Wednesday, the Fed held borrowing costs at a 23-year high of between 5.25 and 5.5 per cent, but Powell said the bank could start cutting rates at its next meeting in September.
That gathering will be the last before November’s presidential election, in which vice-president and presumptive Democratic nominee Kamala Harris will aim to tout the Biden administration’s economic record.
Inflation has fallen substantially from its 2022 peak towards the Fed’s 2 per cent target, and officials are keen to avoid damaging the economy unnecessarily by waiting too long to cut rates.
Powell said he no longer needed to see evidence of a weakening labour market to feel confident that inflation was coming under control.
“I don’t now think of the labour market in its current state as a likely source of significant inflationary pressures,” he said on Wednesday. “So I would not like to see material further cooling in the labour market.”
The Fed’s goal is to pull off a so-called soft landing for the economy, whereby inflation falls back to target without a sharp rise in job cuts. Such a scenario has proven difficult in the past, with efforts to cool overheated economies often resulting in recessions.
Fed officials believe they are on course to avoid this outcome, but a stock sell-off on Friday, prompted in part by weak manufacturing data, suggested markets are growing nervous about a potential slowdown.
Elizabeth Warren, the progressive Democratic senator from Massachusetts, accused Powell of making a “serious mistake not cutting interest rates”.
“He’s been warned over and over again that waiting too long risks driving the economy into a ditch,” she wrote on X.
So far, companies have responded to higher interest rates by culling job vacancies instead of laying off workers. The number of job openings slowed in June, according to data this week, falling to about 8mn after peaking just above 12mn in 2022.
But there are concerns that once some companies begin to cut workers, others will follow.
Friday’s report showed jobs were added across the healthcare, construction, transportation and warehousing industries. Hiring stalled in sectors including manufacturing, retail sales and leisure and hospitality.
On Friday, US President Joe Biden acknowledged that employment is “growing more gradually”, but he stressed that business investment “remains strong”.
Average hourly earnings rose 0.2 per cent for the month and have increased 3.6 per cent over the past year.
The BLS said that a hurricane that made landfall in Texas early on in the collection process for July’s jobs report had “no discernible effect” on the data.
However, Thomas Simons, a senior economist at Jefferies, said his team was “somewhat sceptical about that based on the excessive responses of workers not able to work due to weather, or working part-time due to weather”.
