The unexpected rise in the unemployment rate to 4.3% has increased the likelihood of a significant rate cut by the Federal Reserve in September, as analysts question the Fed's timing and approach amidst a weakening labor market.
Non-farm payroll data released Friday showed the US economy added far fewer jobs than expected last month.
Data from the Bureau of Labour Statistics on Friday showed 114,000 jobs were added to the US economy in July - far off expectations for 175,000.
What’s more, the unemployment rate is at its highest level since October 2021.
This comes as fears grow that the Federal Reserve's efforts to stem inflation by holding interest rates this week could put the US at risk of recession.
According to analysts, the odds of a 50 basis point cut in September have surged to 70%, according to Jay Woods, chief global strategist at Freedom Capital Markets (NASDAQ:FRHC).
“Was the data dependent Fed too late to act again? The market is saying just that,” Woods commented.
“The trends in inflation were heading in the right direction, but the softening of the labor market never seemed to get the focus when discussing their ‘dual mandate’. This week that narrative changed and the market is leading that discussion.”
Market trends align with anticipated seasonal headwinds for August and September. Historically, a 10% correction occurs once a year, and the Nasdaq is already showing signs, with the S&P 500 likely to follow, Woods noted.
Pressure on the Fed is mounting, with market interest rates pushing for action. Even with a September rate cut likely, analysts caution that the combination of a large central bank balance sheet, full employment, and a significant budget deficit limits the scope for an extended rate-cutting cycle in 2025.
“The economy and the stock market have been resilient because unemployment has stayed low and consumers have kept spending, but if that is no longer the case then the Fed has made a serious error in keeping rates too high for too long,” said Chris Zaccarelli, Chief Investment Officer for Independent Advisor Alliance.
“This morning’s jobs data is only one data point and if it turns out that this is just some noise in the labor market data and that stabilizes – similar to how we had some noise in the inflation data earlier this year before that stabilized – then this will be looked back at as a temporary period of weakness in the economy and stock market.
However, if this is the beginning of a turn in the economy for the worse, then all bets are off and the Fed will need to cut rates at a much bigger magnitude and frequency than they were indicating just two days ago.”