Markets now lean toward a Fed hold as gold rallies and Treasury yields drop
The US economy shed 23,000 jobs in July, its first monthly decline in five months, a surprise that pushed investors to abandon bets on a near-term Federal Reserve interest-rate increase and helped lift gold and US equities.
The drop, reported Friday by the Bureau of Labor Statistics, undercut the 80,000 gain economists surveyed by Reuters had forecast.
The agency also revised the two prior months sharply lower, cutting a combined 103,000 from May and June and trimming June's tally to 20,000 from a previously reported 57,000.
US job growth has now averaged 20,000 a month over the past three months, down from 77,000 in the three months through June.
The unemployment rate slipped to 4.1 percent from 4.2 percent, but the decline reflected a shrinking workforce rather than stronger hiring.
About 264,000 people left the labour force, dragging participation to 61.4 percent, near a five-and-a-half-year low.
Bill Adams, chief US economist at Fifth Third Commercial Bank, wrote that the US jobless rate was falling for the wrong reason and tied the smaller labour pool to reduced immigration.
Economists cautioned against reading the report as a sudden break.
"This is the third summer in a row that we have seen unexpected weakness in the labor market," said Stephen Stanley, chief US economist at Santander US Capital Markets, who added that policymakers broadly view the labour market as stable.
Still, Bruce Kasman, chief economist at JPMorgan, called the softness "something that is genuine."
Markets moved quickly.
According to the CME's FedWatch tool, the odds that the Fed holds rates at its September meeting rose to about 60 percent from 45 percent a day earlier, while the two-year Treasury yield fell to roughly 4.2 percent.
The dollar index dropped 0.44 percent to 99.50 and the greenback fell to about 157 yen, days after Japanese and US authorities jointly intervened to support the currency.
The S&P 500 climbed 0.6 percent to a record high.
The report lands in an unusually hawkish moment for the Fed.
Policymakers held the benchmark rate at 3.5 percent to 3.75 percent in a 9-3 vote at their late-July meeting, with three officials dissenting in favour of a quarter-point hike: Minneapolis Fed President Neel Kashkari, Dallas Fed President Lorie Logan and Cleveland Fed President Beth Hammack.
Inflation has stayed well above the 2 percent target, with the consumer price index at 3.5 percent in June and the Fed's preferred core measure at 3.3 percent, pressures several officials have linked to the war in the Middle East and higher energy costs.
Some policymakers have kept pushing for tighter policy.
"Given the strength of demand and investment, I do not see the current stance of monetary policy as restrictive," Kansas City Fed President Jeff Schmid said, backing a hike.
Richmond Fed President Tom Barkin struck a steadier note, describing the US labour market as "very consistent with how I've been seeing the labor market, which is: it's not loose, it's not tight."
Investors remain split on where the Fed lands.
Thierry Wizman, global FX and rates strategist at Macquarie Group, said the market has pushed the likely hike from September into October or December.
Citibank economists went further, writing that increases now look unlikely and that they expect the next move to be a cut, with October as their base case.
Others held firm: Aditya Bhave, a US economist at Bank of America Securities, said "the July jobs report was a bit dovish on net" but stuck with a call for 75 basis points of hikes this year, starting in September.
Attention turns to the July inflation reading due Wednesday.
"Weak payrolls print may ease the pressure on the Fed to raise rates at its September meeting, but next week's inflation data will still likely be the deciding factor," said Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management, in comments reported by CNBC.
Chair Kevin Warsh, who has declined to guide markets on the rate path, speaks later this month at the Jackson Hole symposium.
"At this point it's no longer just about the economic data, it's also about Fed credibility," said Torsten Slok, chief economist at Apollo Global Management.
Beneath the headline, private payrolls rose 30,000, matching June, while governments cut 53,000, led by a 49,600 fall in local-government education that economists tied to seasonal-adjustment quirks around the school calendar.
Leisure and hospitality lost 40,000 for a second straight month, which analysts linked to the fading boost from the FIFA World Cup.
Retail shed about 19,000 jobs and financial activities 14,000, while health care and construction each added 22,000.
Average hourly earnings rose two cents, slowing annual wage growth to 3.2 percent from 3.4 percent, the weakest since May 2021.
Gold, a beneficiary of the softer rate outlook and weaker dollar, rose 2.55 percent Friday to about US$4,347 an ounce and steadied near US$4,345 in early Monday trading after gaining more than 7 percent last week, its best week since January, according to Bloomberg data.
Even so, bullion remains nearly a fifth below its level before the Middle East conflict began in late February.
