Soft Labor Data Clouds Rate Hike Odds Ahead of September Decision

The latest labor market data has cast doubt on the timing and magnitude of future Fed hikes, making the upcoming CPI release a key tiebreaker for a September rate decision.

According to the report, nonfarm payrolls decreased by 23k in July, far below expectations, with the bulk of the decrease seen in leisure and hospitality (-40k) and local government/education (-50k).

The prior two months' payroll growth were revised lower to 20k and 63k, respectively, bringing the 3-month average payroll growth to a paltry 20k. Wage growth was also soft, increasing 0.05% on the month, leaving year-over-year growth at 3.15%.

Markets had viewed a September rate hike as nearly certain just one month ago, but the labor market report reopened the debate, raising concerns about a softening economy and changing the risk-reward tradeoff of immediate Fed action.