Weak July Jobs Report Shifts Rate Odds Toward September Pause — Evening Brief – 08.07.26

The U.S. labor market weakened sharply in July as payrolls declined, earlier job gains were revised substantially lower and wage growth missed expectations, reinforcing investor bets that the Federal Reserve will leave interest rates unchanged in September.

U.S. payrolls fell by 23,000 in July, a sharp deterioration from June’s downwardly revised 20,000 gain and the weakest print since February’s decline of 156,000. The drop was compounded by steep downward revisions to prior months: May’s employment additions were cut by 66,000 to 63,000, while June’s were trimmed by 37,000 to 20,000. Combined, employment across May and June came in 103,000 lower than previously reported.

The hiring weakness was concentrated in local government education, which shed 50,000 jobs, along with retail trade (-19,000) and financial activities (-14,000). Those losses were partly offset by continued growth in health care, which added 22,000 jobs, though that marked a slowdown from its 12-month average monthly gain of 36,000.

Despite the weak headline number, the unemployment rate declined to 4.1% from 4.2%, driven by a 178,000 drop in the number of unemployed workers that outpaced an 87,000 decline in the employed. The labor force participation rate ticked down to 61.4% vs. 61.5% prior. Average hourly earnings rose just 0.1% month-over-month, well below the 0.3% estimate and last month’s 0.3% increase, translating to a 3.2% annual gain versus the 3.5% median forecast.

The report caps a stretch of mixed economic indicators. Initial jobless claims reached their lowest survey-week level since September 1969, while ADP private payrolls disappointed. Manufacturing employment expanded for the first time in 33 months, but services employment contracted.

In response to the weak hiring and cooling wages, financial markets swiftly recalibrated interest rate expectations. CME FedWatch probabilities showed markets assigning a 56% chance that the central bank would hold rates steady at its September meeting, up from 45% a day earlier. The implied odds of an October rate hike fell to 47% from 52%.