July 2 - New labor market data released Thursday showed the U.S. economy added far fewer jobs than economists had expected over the past two months, prompting traders to scale back expectations that the Federal Reserve will raise interest rates later this month.
The Labor Department's Bureau of Labor Statistics reported that nonfarm payrolls rose by 57,000 in June. That outcome was roughly half of the consensus forecast. At the same time, May payroll gains were revised down to 129,000 from the previously published 172,000.
Market participants reacted quickly to the weaker employment figures. Traders in short-term interest-rate futures now assign under a 20% probability to a Fed rate increase in July. Nevertheless, futures market pricing continues to signal that a policy-rate hike in September remains the more likely path; contracts imply about a 60% chance of a September increase versus the alternative of keeping the federal funds rate steady in the current 3.50%-3.75% range. Prior to the jobs report, traders had placed roughly a 75% probability on a September hike.
The shift in expectations follows commentary highlighting the implications of the payroll slowdown. "The slowdown in payroll growth challenges the narrative of renewed labour market strength that has been building in recent months but, importantly, reinforces the view that the Federal Reserve is under little pressure to tighten policy," wrote Principal Asset Management chief global strategist Seema Shah.
In short, the fresh employment data weaken the immediate impetus for a tightening move by the Fed and have led markets to reduce the odds of a July increase. At the same time, market-implied odds for a September move remain elevated relative to July, reflecting a view among traders that additional information between now and September could still alter the policy outlook.
Market snapshot
- June nonfarm payrolls: +57,000.
- May payrolls, revised: 129,000 (from 172,000).
- Current federal funds range cited in market pricing: 3.50% - 3.75%.
- Probability of July rate hike per short-term futures: under 20%.
- Probability of September rate hike reflected in futures: about 60% (down from ~75% before the report).
This report and market response provide a snapshot of how incoming economic data continue to shape expectations for monetary policy moves. Traders have adjusted their outlook materially following the employment figures, reducing the near-term likelihood of a policy tightening while leaving the possibility of a later move on the table.