Payrolls Fall 23,000, September Cut Odds Jump to 58%

The US economy shed jobs in July, a result almost no one forecast, and the previous two months were revised down by a combined 103,000 jobs. Nonfarm payrolls fell 23,000 against an expected gain of 80,000, the Bureau of Labor Statistics said Friday. The labor market did not just cool. It went backwards.

The report landed nine days after the Federal Reserve's most divided decision in a decade. On July 29 the Fed held its policy rate at 3.50% to 3.75% in a 9-3 vote. Beth Hammack and Neel Kashkari dissented alongside Lorie Logan, all three wanting an immediate increase. Their inflation-first case had been strengthened by a rebound in energy prices and by market pricing that, through last week, leaned toward a September hike. The July employment data points the opposite way. Within minutes of the release, Fed funds futures began pricing a September rate cut as the base case.

The details were as weak as the headline. Losses were concentrated in local government education, down 50,000, and retail trade, down 19,000. The unemployment rate fell to 4.1% from 4.2%. The drop came from shrinking labor force participation, not hiring. Wage growth also slowed.

The timing matters because the July hold was never a consensus to wait. The three dissenters wanted to raise rates now, arguing inflation had run above target for years. This report guts their case and hands Chair Kevin Warsh, who said he wanted a good family fight over policy, a stronger hand for the doves. FinanceFeeds noted when the dissents landed that the next hard data would be the deciding piece of evidence. It has now arrived.

The cross-asset reaction arrived within minutes. The CME Group FedWatch tool prices a September cut at 58.1%, up from 45% a day earlier and 33% a week ago. CME Group carries an Alpha Score of 56, labeled Moderate. In seven days, a market that was debating a hike swung to favoring a cut. Treasuries rallied, sending yields lower. The 2-year yield, the maturity most sensitive to Fed policy, fell to 4.21%. The 30-year yield eased to 5.21%. The dollar slipped, extending a monthly decline of more than 1%.

Lower rate expectations dragged yields down, which weakened the dollar and lifted gold. Gold jumped 1.66% toward $4,350 an ounce, a move tracked in the gold profile. Bitcoin rose near $65,000, reversing the risk-off tone that had it under $63,000 before the Fed meeting, when ETF outflows and fear dominated. The market read a weaker economy as good news for both metals and crypto because it pulls the Fed toward easing.

The September 15-16 FOMC meeting is the next event. A committee that was fighting over whether to hike is now far more likely to debate whether to cut. The futures market has made its call, though one soft report does not set policy. The energy price rebound that worried the dissenters has not vanished, and a hot inflation print before September could complicate the picture. The burden of proof has flipped. The first hard evidence after the dissenters' vote has landed against them.