US Jobs Report Throws a Curveball at the Federal Reserve

The US economy unexpectedly shed jobs in July, with nonfarm payrolls falling by 23,000, according to the Bureau of Labor Statistics. This number contradicted expectations of an 80,000 gain and marks a significant cooling of the labor market.

The timing of this report is particularly notable, as it comes just nine days after the Federal Reserve's most divided meeting in a decade. In that meeting, all three dissenters wanted to raise interest rates, not cut them. The jobs report now points to an easing, rather than tightening, stance from the Fed.

The one number that seemed reassuring was actually misleading. The unemployment rate fell to 4.1% from 4.2%, but this decline was driven by a decrease in labor force participation, not job creation. This is a sign of weakness, rather than strength, and wage growth also slowed down.

The market reacted quickly to the report, with Fed funds futures now pricing a September rate cut at 58.1%, up from 33% just a week ago. Treasuries rallied, sending yields down, while risk assets and hard assets both rose in value.