U.S. stocks rise as July payrolls fall 23,000, cooling rate-hike odds

U.S. stocks rose Friday after July payrolls fell 23,000, far below the 85,000 consensus, giving the Federal Reserve reason to hold rates steady next month.

"The July payroll release disappointed across the board, reversing the trend of this year's positive labor market momentum," said Jeff Schulze, head of economic and market strategy at ClearBridge Investments. "Today's release should be modestly positive for risk assets as yields come down and expectations for rate hikes are pushed out."

The unemployment rate edged down to 4.1% from 4.2% in June, while the labor force participation rate fell to 61.4%, its lowest since February 2021. Private-sector payrolls rose 30,000, below the 79,000 expected, with leisure and hospitality shedding 40,000 jobs and retail trade down 19,400. Healthcare added 25,000 positions, while construction gained 22,000.

Futures traders cut the odds of a September rate hike to 44% from 55% a day earlier, according to CME Group FedWatch. The Fed left its benchmark rate in the 3.50%-3.75% range last week, with three policymakers dissenting in favor of a quarter-point increase. Next Wednesday's CPI report will sharpen the debate on the near-term policy outlook.

Payrolls Miss Compounds Downward Revisions

The July report marked the second consecutive monthly disappointment, with May's gain revised down to 63,000 from 129,000 and June's to 20,000 from 57,000 — a combined 103,000 fewer jobs than previously reported. The three-month average gain fell to 20,000 from 77,000 in June.

Government employment dropped 53,000, almost entirely from a surprising 49,600 decline in local government education jobs. Wage growth remained well behaved, with private-sector average hourly earnings up 0.1% month over month, the smallest gain since December, and 3.2% from a year earlier. The average workweek held at 34.3 hours for a fourth straight month.

Fed in a Bind as Inflation Stays Sticky

The weak report complicates the Fed's calculus, since inflation remains elevated even as the labor market cools. "Friday's jobs report was not just much weaker than expected, it showed that the economy shed jobs during July, which puts the Federal Reserve in a conundrum," said Brent Wilsey, chief investment officer at Wilsey Asset Management.

The ADP National Employment Report on Wednesday showed private payrolls rose 44,000 in July, below the 75,000 economists expected and the 95,000 added in June. "The combination of negative headline job creation and downward revisions stand in contrast to the lower unemployment rate, presenting conflicting signals for the Fed," Schulze said.

Sonu Varghese, chief market strategist at Carson Group, said the weakness was concentrated in local government and leisure and hospitality, with the unemployment rate at its lowest in a year suggesting the labor market "remains in solid shape despite the volatility in payrolls." Bill Adams, chief U.S. economist at Fifth Third Commercial Bank, noted the falling unemployment rate reflects a shrinking labor force rather than strong hiring, with immigration crackdowns cutting labor supply.

Rate-sensitive technology and growth names stood to benefit most from the repricing, as lower borrowing costs support longer-duration earnings. The rally also lifted Treasury prices, pushing yields lower, while the dollar held steady against major peers.

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