US jobs report shocks markets, dollar slides and stocks rally as rate hike bets evaporate

The Labor Department’s nonfarm payrolls report for July marked a sharp reversal for the U.S. labor market, with the economy shedding 23,000 jobs against a Reuters poll of economists that had forecast a gain of 80,000. Hiring in the prior two months was revised down by a combined 103,000, according to multiple reports.

The unemployment rate fell to 4.1% from 4.2% in June — but only because workers left the labor force. The labor participation rate dropped to a near five-and-a-half year low of 61.4%, reported the Economic Times. Average hourly earnings rose 3.2% on the year, below consensus expectations for a 3.5% increase.

“The magnitude of the payroll miss suggests the labor market may be losing momentum and can no longer be considered the pillar of strength,” Charlie Ripley, senior investment strategist for Allianz Investment Management, said in a statement shared with Newsweek. “This report squarely puts the spotlight back on the employment side of the Fed’s mandate.”

Market expectations for a rate hike at the Federal Reserve’s September meeting collapsed. According to the CME’s FedWatch tool, the probability of a hike dropped to about 44% from 55% a day earlier and from 67% a week ago, several outlets reported.

“If you look at all the data components, wages, nonfarm payrolls, this is a very weak labor market that's all of a sudden happened,” Tom di Galoma, managing director of global rates trading at Mischler Financial Group, told the Economic Times. “It takes the Fed off the hiking table.”

The dollar slumped against major currencies. The dollar index, which measures the greenback against a basket of six peers, fell 0.44% to 99.50, on track for a second consecutive weekly decline, the Economic Times reported. The dollar weakened 0.57% against the yen to 157.56, giving back gains from earlier in the week after a historic intervention by Japanese and U.S. authorities. The euro rose 0.39% to $1.1568.

Treasury yields fell sharply. The two-year note yield, which moves in step with Fed rate expectations, dropped 4.35 basis points to 4.202%, the lowest since July 17, according to the Economic Times. The benchmark 10-year yield fell 1.44 basis points to 4.656%. The yield curve between two- and 10-year notes steepened to 46 basis points.

Stock markets rallied. The S&P 500 closed at a record 7,757.64, up 0.6%, the Economic Times and Star-Advertiser reported. The Nasdaq Composite jumped 1.3% to 26,690.62, and the Dow Jones Industrial Average rose 0.3% to 54,036.93. All three major indexes posted their biggest weekly percentage gains since mid-April, according to multiple reports. Europe’s STOXX 600 also hit a record close, rising 0.3% to 660.25 points, the Economic Times reported, led by technology stocks.

Technology shares drove much of the advance on Wall Street. Nvidia jumped 2.3% and Broadcom rose 1.7%, AP reported via RTHK.

“Although the stock market is likely to welcome the dovish implications of the report, investors should be wary of the future growth potential of an economy where fewer people are working,” Peter Graf, chief investment officer at Amova Asset Management Americas, said in a research note cited by RTHK.

The strong rally came despite a mixed economic picture. “You probably have to lower rates to kind of stimulate job growth, but if you lower rates, you’re going to also stimulate inflation. So you’re kind of in a pickle at this point, and yet the market’s just taken off because earnings have been stellar,” Tom Siomades, chief market economist at AE Wealth Management, told Reuters in a report carried by the Business Times and Star-Advertiser.

Earnings have been a major tailwind. Of the 436 companies in the S&P 500 that have reported results through Friday morning, 85.1% have topped analyst expectations, well above the 68% average since 1994, according to LSEG data cited by the Business Times and Star-Advertiser.

The report also has implications for the housing market. A weaker labor market could reduce the likelihood of further rate hikes, which would prevent mortgage rates from climbing further, Newsweek reported. However, softer hiring and wage growth could also dampen homebuyer confidence.

“Anything other than a rate hike is likely good news for homebuyers,” Jake Krimmel, senior economist at Realtor.com, said in a statement shared with Newsweek. But he cautioned that “a weaker jobs market means less confidence to buy.”

The Fed’s next policy meeting is in September. New Chair Kevin Warsh has offered investors little forward guidance, Reuters reported, leaving markets focused on economic data. The bond market’s next big test comes next week with the July consumer price index, due on August 12, according to Newsweek.

“Today’s weak payrolls print may ease the pressure on the Fed to raise rates at its September meeting, but next week's inflation data will still likely be the deciding factor,” Ellen Zentner, chief economic strategist for Morgan Stanley Wealth Management, said in a research note cited by AP via RTHK.