July jobs report expected to show hiring slowed while unemployment rate ticked higher

The upcoming July jobs report is anticipated to show a notable slowdown in hiring, with nonfarm payrolls projected to rise by 105,000 and the unemployment rate to increase to 4.2%. This expected moderation, alongside other recent softening labor market indicators, is crucial for investors monitoring the Federal Reserve's stance on interest rates, especially following its recent decision to hold rates steady. The data will inform market expectations regarding the timing of potential rate cuts, as the Fed closely scrutinizes labor market health.

Analysis

The market is anticipating a material cooling in the U.S. labor market with the upcoming July jobs report, as consensus estimates compiled by Bloomberg project a slowdown in nonfarm payroll growth to 105,000 from 147,000 in June and an increase in the unemployment rate to 4.2% from 4.1%. This expected moderation is reinforced by recent data, including a decrease in JOLTS job openings to 7.44 million and a hiring rate that fell to a multi-year low of 3.3%. Despite this slowdown, wage pressures are expected to persist, with average hourly earnings forecast to accelerate slightly to a 0.3% month-over-month and 3.8% year-over-year pace. This dynamic supports the view from BofA that the market is "moderating rather than deteriorating," and aligns with Fed Chair Powell's assessment of a "solid" but rebalancing labor market. While ADP private payroll data for July showed a rebound to 104,000, its chief economist noted the market has "recalibrated to a lower average level," a level still deemed sufficient to support consumer spending. The overall picture suggests a labor market losing momentum, a key factor for the Federal Reserve, which just held rates steady, but with underlying wage growth that could keep it on hold to combat elevated inflation.

Key Decisions for Investors

• Given the consensus for a slowdown, a significant deviation from the expected 105,000 payrolls could trigger market volatility, with a much weaker number potentially accelerating rate-cut expectations and a strong number challenging the current dovish narrative.
• Investors should closely monitor the average hourly earnings data, as an outcome matching or exceeding the forecast of 3.8% year-over-year growth could indicate persistent inflationary pressures, potentially delaying any Fed rate cuts even if headline job growth is soft.
• A report in line with expectations would reinforce the soft-landing thesis and the Fed's current 'on hold' stance, likely supporting risk assets, whereas a sharp miss could increase recessionary fears and prompt a move to more defensive positioning.