US employment unexpectedly fell in July amid a marked decline in government payrolls, prompting interest rate traders to scale back their bets on potential monetary policy tightening in September.
Nonfarm payrolls fell by 23,000 last month, marking the first decline since February, following a downwardly revised gain of 20,000 in June, the Bureau of Labor Statistics said Friday. The consensus was for an 80,000 increase in July, according to a Bloomberg-compiled survey.
May's employment growth was also downgraded, by 66,000 to 63,000, according to the BLS.
Friday's data showed a 53,000 drop in government payrolls in July, driven by a sharp pullback in local government education. Leisure and hospitality, as well as retail trade also logged declines. Overall, private employment growth was steady at 30,000.
"This morning's softer employment report helped to quiet the noise of a September rate hike," Thomas Feltmate, senior economist at TD Economics, said in a report.
The probability of the Federal Reserve raising its benchmark rate by a quarter percentage point next month eased to 44% on Friday from 55% on Thursday, according to the CME FedWatch tool. The odds that the central bank will maintain its policy jumped to 56% from 45%.
The unemployment rate fell to 4.1%, the lowest since June 2025 when it stood at the same level, while Wall Street expected an unchanged print of 4.2%.
US Treasury yields were down following the jobs report, with the 10-year rate falling by 4.7 basis points to 4.62% and two-year rate dropping by 6.9 basis points to 4.18%.
"Continued disinflation in the months ahead and no signs of an emerging wage-price spiral should help to contain expectations for rate hikes by the end of the year, and we continue to maintain our view that the next move is a cut, and most likely to occur in December this year," Jefferies Chief US Economist Thomas Simons said in a report e-mailed to.
Last month, the central bank's 12-member Federal Open Market Committee maintained the policy rate at 3.50% to 3.75% for the fifth consecutive time. However, three regional Fed presidents -- Beth Hammack of Cleveland, Neel Kashkari of Minneapolis and Lorie Logan of Dallas -- preferred to raise rates by a quarter percentage point.
In separate statements last week, the three said the Fed may need to pursue an aggressive tightening cycle if it doesn't raise interest rates immediately to bring inflation down.
"The focus now shifts to next week's (consumer price index) report, where we expect a milder print to provide further reassurance that the effects of the supply shocks are fading, reinforcing our view that the Fed is likely to remain on hold," Feltmate said.
