The latest employment data in the United States in July has caught the market by surprise, leading to a downward revision of expectations for the Federal Reserve’s (Fed) interest rate hike in September. The unexpected decrease of 23,000 non-farm jobs reported by the Bureau of Labor Statistics (BLS) in the U.S. employment report for July, compared to the market’s original expectation of an increase of 80,000 jobs, along with a significant downward revision of 103,000 jobs added in May and June, has caused concern. The unemployment rate stands at 4.1%, indicating signs of contraction and weakening in the labor market.
This report, which is considered “dovish,” has significantly cooled down the market’s expectation of the Fed raising interest rates next month. In response to the dampening of interest rate hike expectations, all three major U.S. stock indexes were up on Friday. The S&P 500 index rose by 47.68 points, or 0.62%, closing at a historic high of 7,757.64 points; the Nasdaq Composite index increased by 342.26 points, or 1.3%, reaching 26,690.62 points; while the Dow Jones Industrial Average climbed 151.83 points, or 0.3%, to 54,036.93 points.
According to data from LSEG, the probability of the Federal Reserve raising interest rates in September, as estimated by the federal funds rate futures market, has dropped significantly from 57% before the employment report to 44%. The decline in expectations for an interest rate hike, coupled with the recent strong corporate financial performance, has injected confidence into the U.S. stock market, directly propelling the S&P 500 index to achieve a historic high.
While stock market investors view the “soft employment” data as a positive sign for a shift in monetary policy, overall economists are more cautious. They believe it is too early to assert that the Fed will stop raising interest rates.
Aditya Bhave, an economist at Bank of America Securities, analyzed, “We agree that the July employment report leans towards the dovish side, but we still maintain our original forecast that the Fed will raise interest rates by a total of 75 basis points this year, starting in September.” Bhave emphasized that the Federal Reserve’s current policy focus will continue to be on “inflation” data rather than solely on the performance of the job market.