Weak NFP Flips Fed Odds Toward Hold as Oil Remains Above $80

The July NFP report revealed a shocking employment downturn, which has significantly shifted Fed expectations. The report showed a nonfarm payroll contraction of -23K in July, with substantial downward revisions to May and June's numbers. This has strengthened the case for the Fed to stay on hold in September.

This unexpected weakness has created an increasingly uncomfortable tug-of-war between markets. The labor market is weakening, but inflation risk hasn't disappeared, particularly with Brent crude oil still above $80. Oil provides a significant source of inflation pressure that policymakers must address.

The Treasury market now serves as the confirmation test for whether the post-NFP dovish shift has further to run. Given the scale of the payroll disappointment, the 10-year yield should have broken decisively lower. However, it recovered to close around 4.66%, suggesting investors aren't yet prepared to dismiss persistent inflation risk.