The job market isn't as good as we thought. There might be an upside for Trump.

U.S. job growth significantly decelerated in July, adding a weaker-than-expected 73,000 jobs, compounded by massive downward revisions of 258,000 jobs for May and June, indicating a substantial cooling of the labor market. This data, alongside broader signs of economic slowdown, has sharply increased the likelihood of a Federal Reserve rate cut, with investors now assigning a 75% probability for September. The deteriorating employment picture, despite persistent inflation concerns, is shifting the Fed's policy calculus as elevated rates and trade tensions weigh on the economy.

Analysis

The U.S. labor market is exhibiting clear signs of deceleration, a development that significantly alters the outlook for Federal Reserve monetary policy. The addition of only 73,000 jobs in July fell short of economist forecasts, but the more impactful data point was the downward revision of 258,000 jobs for May and June, which the Labor Department acknowledged was "larger than normal." This revision, combined with data showing slower household and business spending in the second quarter, paints a consistent picture of a cooling economy under pressure from elevated interest rates and trade policy. Consequently, investor expectations for a policy pivot have solidified, with CME Group data indicating a 75% probability of an interest rate cut in September. This puts the Federal Reserve in a complex position, balancing the need to support a weakening labor market against persistent concerns about tariff-induced inflation. The recent dissenting votes from Fed board members Christopher Waller and Michelle Bowman highlight that downside risks to employment are becoming a more prominent concern within the committee, suggesting the burden of proof may have shifted toward justifying inaction rather than an easing of policy.

Key Decisions for Investors

• Given the heightened 75% probability of a September rate cut, investors should re-evaluate portfolios for sensitivity to lower interest rates, particularly positions in fixed income and rate-sensitive equity sectors.
• Monitor upcoming inflation and employment data releases closely, as these will be the determining factors for the Federal Reserve's decision and could trigger significant market volatility if they deviate from the current weakening trend.
• Investors should factor in the dual risks of a continued economic slowdown driven by trade policy and the potential for persistent inflation, which could complicate the Fed's ability to act and create an uncertain investment environment.