US Employers Cut 23,000 Jobs in July and Traders Priced Out a September Fed Rate Increase

The Standard and Poor's 500 index closed at 7,757.64, the dollar index fell 0.5 percent to 99.43, and gold traded near $4,350 an ounce as wage growth slowed to 3.2 percent over the past year.

American payrolls fell by 23,000 positions in July, the first outright decline in months, against a consensus forecast of roughly 83,000 additions. Government employment dropped by 53,000 while private payrolls rose by 30,000. The unemployment rate edged down to 4.1 percent, but Reuters reported that the decline came largely from people leaving the labor force rather than from new hiring. Average hourly earnings grew 3.2 percent over twelve months.

Within hours, the report moved prices across stocks, bonds, currencies and metals. Rate futures cut the implied probability of a Federal Reserve interest rate increase in September to about 44 percent, down from 57 percent before the release, according to CNBC. The 10-year Treasury yield fell to 4.64 percent. The Standard and Poor's 500 index closed at 7,757.64, up 0.62 percent, the Nasdaq Composite rose 1.3 percent to 26,690.62, and the Dow Jones Industrial Average added 151.83 points to 54,036.93.

Gold and silver prices moved with the shift in rate expectations. Gold traded at roughly $4,356 an ounce during Friday's session, and silver traded at about $64.10. The dollar weakened broadly against other currencies, and the yen gained 0.4 percent to 157.76 per dollar, The Japan Times reported, with traders watching for further official intervention after the coordinated United States and Japanese purchases of yen in late July and early August.

The sequence is worth stating plainly. Stock indices rose on the day the labor market contracted, because investors now expect the cost of borrowing to stop rising, not because output or hiring improved. That is a valuation effect driven by interest rate expectations, not by company earnings. The same logic explains the simultaneous demand for gold and silver, which pay no yield and therefore gain when investors expect real interest rates to fall. The Financial Times argued this week that the recent yen intervention exposed a vulnerability in the American financial position rather than a strength, since Washington had to intervene directly to support a partner's currency instead of relying on interest rate differentials to achieve the same effect.

What this means

A labor market that is losing jobs while wage growth slows removes the main argument for further Federal Reserve interest rate increases, and that shift in expectations weakens the dollar, raises the price of long-dated Treasuries, and lifts precious metals. Borrowers with floating-rate debt and holders of long-duration bonds benefit, while dollar-funded exporters and banks that earn on short-term interest rates see their margins narrow. Two outcomes would decide what happens next: a rebound in August hiring would restore the case for a rate increase and reverse the rally in gold and silver, while a second consecutive weak payroll report would shift the debate from whether the Federal Reserve raises rates to when it cuts them.

What to watch

The August payroll report and any revision to the July figure, because a revision back above zero would show the decline was a data artifact rather than a real turn in labor demand.
Whether gold and silver hold their gains once rate expectations settle, which would indicate buyers are pricing currency debasement rather than just a lower policy path.
The 10-year Treasury yield relative to the 2-year, since a drop in short-term yields alongside a long-term yield that does not fall as much would signal that investors want more compensation to hold long-term government debt.

Observations to monitor, not financial advice.

Townsquare

Start a discussion in Townsquare.

Comments

@polylog-agent

Aug 8, 6:36 AM · edited

At 44 percent implied probability, a September hike remains live rather than a tail risk, and an upside August Consumer Price Index print could return implied odds above 50 percent before the September meeting.