For months the debate inside the Federal Reserve has been whether to raise interest rates, not cut them, because energy costs tied to the Iran war have kept inflation stuck above target. This morning’s jobs report scrambled that. Employers cut workers in July instead of adding them, and raising rates to slow an economy that is already shedding jobs is a much harder case to make. BlackRock’s Rick Rieder, who oversees the firm’s global fixed income business, made exactly that argument on Bloomberg television hours after the numbers landed, calling the report unremarkable and pointing to a productivity boom he believes is doing the Fed’s inflation work for it.
The data came out at 8:30 a.m. Eastern. Total nonfarm payroll employment fell by 23,000 in July, against an average monthly gain of 34,000 over the prior twelve months, the Bureau of Labor Statistics reported. Forecasters had expected a gain of 83,000. May was revised down by 66,000 and June by 37,000, leaving employment across the two months 103,000 lower than previously reported.
The unemployment rate fell, but not for a good reason. It slipped to 4.1% as the labor force participation rate dropped to 61.4%, the lowest in more than five years. Household employment fell by 87,000, and the jobless rate declined only because 264,000 people left the labor force altogether. Outside the Covid period, participation is at its weakest since the mid-1970s, and the employment-to-population ratio fell to 58.9%, a level last seen in May 2014. Average hourly earnings are up 3.2% over the year.
Traders repriced within minutes. Fed funds futures put the odds of a September rate increase at 40%, down from 55% before the release. CME’s FedWatch gauge showed September hike odds at 44% and October at 58.3%. The probability that the Fed simply holds in September climbed to 60% on FedWatch, up from 45% a day earlier and from roughly one-in-three a week ago; on the prediction platform Kalshi, hold odds reached 65%.
Bonds moved with them. The two-year Treasury note, the maturity most sensitive to Fed expectations, fell 8 basis points to 4.16%, and the ten-year dropped 6 basis points to 4.61%. The dollar index slipped 0.5% to 99.43, while the yen strengthened to 157.20 after earlier trading near a level that had traders discussing intervention. The 30-year yield eased 2 basis points to 5.189%. Stocks climbed, extending an already strong week.
Rieder’s skepticism about tightening is not new. In BlackRock’s third-quarter outlook, he said his base case was no rate hikes this year, though he would not entirely rule out a move in September, and advised staying conservative on interest-rate exposure — what he called dynamic patience in fixed income. He also argued that markets misread Chair Kevin Warsh’s reduced forward guidance as a source of volatility, and expects the opposite: higher real rates with less turbulence than investors have grown used to. Rieder manages $2.7 trillion in assets and was himself a candidate for the Fed chair nomination that went to Warsh.
The hawkish case has not disappeared. The FOMC left its target range at 3.50% to 3.75% on July 29, with nine members in favor of holding and three preferring an immediate quarter-point increase. Warsh reiterated that the Fed’s definition of price stability remains 2%, signaling that a long run of above-target inflation is not something policymakers intend to accept. June consumer prices ran at 3.5% year over year, with energy pressure from the Middle East the central driver. Oil topped $100 a barrel last month.
That makes next Wednesday the real test. July consumer price data is due August 12, and Morgan Stanley Wealth Management chief economic strategist Ellen Zentner said the weak payrolls print eases pressure on the Fed for September but that the inflation numbers will decide it — a hot reading could keep hike calls alive even with a cooling labor market.
For businesses and households, the practical effect of today’s move is cheaper benchmark borrowing costs at the margin, since the ten-year Treasury sets the tone for mortgages, auto loans and credit card debt. For employers, the message is less encouraging. Government payrolls, mainly local education, fell by roughly 53,000 in July, and leisure and hospitality shed 40,000, while retail trade lost 19,000, concentrated in warehouse clubs and supercenters. Averaged across the past year, the economy has been adding about 34,000 jobs a month — a pace with very little cushion if the Fed ends up tightening into a slowdown.
JBizNews Desk | Wall Street
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