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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 Federal Reserve cuts 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 stock futures fell following the data release.
Traders in the futures market dramatically increased bets on 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 at least one half-point cut this year, given that the Fed only has three meetings left before January.
However chair Jay Powell said on Wednesday that a larger move “was not something we’re thinking about right now”.
The two-year Treasury yield, which moves with interest rate expectations, fell 0.26 percentage points to 3.9 per cent, its lowest level since May 2023.
S&P 500 futures fell 1.7 per cent.
The data comes as a stock sell-off across Europe and Asia gathered pace on Friday, prompted by growing fears about a US economic slowdown after lacklustre results from consumer and tech companies this week.
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 the November presidential election.
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, suggests markets are growing nervous about a potential slowdown.
“If they don’t cut rates, they do risk creating a recession that they don’t want,” said Michael Gapen, the head of US economics at Bank of America, who previously worked at the Fed.
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.
Friday’s report showed jobs were added across the healthcare industry, construction, transportation and warehousing. Hiring stalled in sectors including manufacturing, retail sales and leisure and hospitality.
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 had “no discernible effect” on the data.
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