Investor confidence in an upcoming interest rate cut is rising sharply after a disappointing U.S. jobs report revealed deeper labor market weakness than expected. July payroll growth came in far below forecasts, while May and June figures were significantly revised downward, leading markets to now price in an 87% chance of a Federal Reserve rate cut in September.
Until last Friday, analysts were skeptical that the Fed would move on rates so soon. But new Labor Department data showed payrolls rose by just 73,000 in July—well below the roughly 100,000 expected—and earlier months were downgraded by a combined 258,000 jobs. The three-month average gain now stands at only 35,000, suggesting the labor market is in worse shape than previously thought.
With full employment making up half of the Fed’s dual mandate, the weak data has bolstered expectations that Chair Jerome Powell will act to spur economic activity and protect jobs. Analysts say this could deliver the rate cut the White House has been urging.
President Trump, angered by the revisions, dismissed Bureau of Labor Statistics Commissioner Erika McEntarfer. Markets are still absorbing the implications of the report, which points to tariffs hitting harder than hoped. Investors are also watching for volatility ahead of the August 7 tariff deadline.
Adding to the dovish tilt, Federal Open Market Committee (FOMC) member Adriana Kugler resigned, giving Trump the chance to appoint someone more aligned with his push for lower rates.
Market reactions were mixed. On Friday, the S&P 500 closed down 1.6% and the Nasdaq dropped 2.24%. European markets opened modestly higher today, with London’s FTSE 100 up 0.3% and Germany’s DAX gaining 1.1%. In Asia, Japan’s Nikkei 225 fell 1.25%, while India’s Nifty 50 rose 0.65%. S&P futures were up 0.65% in early U.S. trading.
Analysts expect Powell could signal a policy shift as early as the Jackson Hole Symposium later this month. Trading in CME’s 30-Day Federal Funds futures and options surged after the labor data revisions, with volumes tripling in a day and pricing now pointing toward a base rate around 3.75%—two cuts below the current level.
While some investors had hoped for a cut driven by stable inflation rather than economic strain, Deutsche Bank strategist Jim Reid noted that Kugler’s resignation could further sway the Fed’s balance. Before the payroll release, markets saw just a 40% chance of a September cut; that jumped to 87% afterward.
Macquarie’s head of economics David Doyle wrote that the report’s results are likely to shift the Fed’s risk assessment, though the decision will ultimately depend on upcoming inflation and labor market data.
Even before the jobs report, Powell had repeatedly warned about potential “downside risks” to employment, stressing the need to keep inflation near 2% without tightening policy too far.
However, Oxford Economics lead U.S. economist Bernard Yaros cautioned against expecting an immediate shift, maintaining his forecast for cuts to resume in December. He pointed to labor force data and jobless claims that suggest no sharp rise in unemployment in the near term.
Market snapshot before the New York open:
- S&P 500 futures: +0.7%
- STOXX Europe 600: +0.7%
- FTSE 100: +0.3%
- Nikkei 225: –1.25%
- CSI 300: +0.4%
- Nifty 50: +0.65%
- Bitcoin: Flat at $114,551
