US Economy Contracts in July, Rate-Hike Expectations Fall

The US economy contracted in July, missing analyst expectations with a Non-Farm Payrolls (NFP) reading of -23K. This marks the first contraction in five months and reflects underlying weakness. The BLS report showed that employment in local government education dropped by 49,600 positions, leisure and hospitality fell by 40,000, retail trade declined by 19,400, and financial activities lost 14,000 jobs.

However, the unemployment rate decreased from 4.2% in June to 4.1% in July, contrasting with the NFP contraction. This suggests that the US labour sector retains elements of stability. Nevertheless, this was insufficient to sustain rate-hike expectations, which fell sharply. According to data from the CME FedWatch Tool, the market-implied probability of a 25-basis-point interest rate increase fell from approximately 54% to 44%. The dominant consensus now reflects a 56% probability that the Federal Reserve will maintain interest rates steady at the current 3.75% level during its September meeting.

The release had a positive impact on US equity benchmarks, with the S&P 500 index advancing by 0.62% to 7,757 points, the Dow Jones Industrial Average increasing by 0.28% to 54,042, and the Nasdaq 100 index appreciating by 1.19% to 29,722 points.