Payrolls shed 23K jobs, Treasury yields drop as Fed odds fade

The U.S. economy shed 23,000 jobs in July, sending the 2-year Treasury yield down eight basis points to 4.16 percent and cutting September Fed hike odds to 43.9 percent from 57 percent.

"The labor market appears to have slammed the brakes on new hiring," said Christopher Rupkey, chief U.S. economist at FWDBONDS. "It isn't lights out yet for the economic outlook, but the future is dim if pessimism leads to more dropouts and companies cannot get the help they need to produce the goods and services the economy needs to grow."

The Bureau of Labor Statistics reported nonfarm payrolls contracted by 23,000 last month, well short of the consensus forecast for an 88,000 gain and reversing June's revised +20,000 increase. May and June were revised down by a combined 103,000 jobs. The unemployment rate fell to 4.1 percent from 4.2 percent, but only because 264,000 people exited the labor force, pushing the participation rate to 61.4 percent — a near 5-1/2-year low. The 10-year Treasury yield dropped seven basis points to 4.60 percent, while the 30-year yield eased four basis points to 5.17 percent.

The data complicates the Federal Reserve's path. The Fed left its benchmark rate at 3.50-3.75 percent last week, with three dissents favoring a quarter-point hike. Next week's CPI report will likely determine whether the September meeting produces a hike, a hold, or a cut. "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," said Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management.

Education, Retail, and Finance Shed 83K Jobs

The contraction was concentrated in three areas. Local government education employment fell by 50,000, while retail trade lost 19,000 jobs, the bulk at warehouse clubs, supercenters and general merchandise stores. Financial activities shed another 14,000 positions, bringing the sector's decline to 121,000 since its May 2025 peak. Healthcare added 22,000 jobs, but that was well below the 36,000 monthly average of the past year. Construction and manufacturing were little changed.

The yield curve response was immediate and broad. The 2-year yield broke below its 50-day moving average, reaching its lowest level since mid-July, while the 10-year yield touched an intraday low of 4.6007 percent. For the week, the 2-year yield fell 9.59 basis points and the 10-year fell 8.93 basis points. The dollar slipped against a basket of currencies.

The data also carries political weight. Last year's sharp downward revisions to payrolls led President Donald Trump to fire BLS Commissioner Erika McEntarfer, accusing her without evidence of manipulating the data. This month's contraction and the 103,000 downward revision to May and June will likely intensify scrutiny of the bureau's methodology.

The July CPI report, due next week, will be the decisive input for the September meeting. If core inflation comes in hotter than expected, a cooler labor market may not be enough to quiet calls for hikes inside the Fed. If inflation cools, the case for a prolonged hold — or even a cut — strengthens considerably. LSEG data showed markets pricing a 43.9 percent chance of a September hike, down from 57 percent before the jobs report. The payroll miss also raises questions about the durability of the expansion. Job growth has a tendency to slow during summer months, but last month's decline and the sharp downward revisions to May and June challenge the narrative of a "slow hire, slow fire" labor market. Reuters-compiled estimates for July ranged from as low as 10,000 to as high as 140,000 jobs added, showing the wide dispersion in forecasts.

This article is for informational purposes only and does not constitute investment advice.