U.S. rate futures cut chances of September rate hike after July jobs data

Summary

US non-farm payrolls unexpectedly fell by 23,000 in July, far missing the expected 83,000 increase Reuters. Consequently, interest rate futures now price the probability of a September hike at just 44%, down from being the base case, while the probability of a pause rose to 60.4% Reuters. Treasury yields fell across the board, with the 2-year yield hitting a multi-week low of 4.204% Reuters.

Impact Analysis

So, the labor market finally cracked. This -23k print is a massive shock compared to the +83k expected, marking the first contraction since February Reuters. The market immediately sniffed out the policy pivot, with the 2-year yield diving 4 basis points as traders scrambled to price out a September hike Reuters.

What’s really concerning isn’t just the headline miss; it’s the labor participation rate hitting a five-year low of 61.4% Reuters. This suggests the ‘resilient consumer’ narrative is losing its foundation. The Fed is now in a classic bind—trapped between sticky inflation and a cooling engine. While they’re still signaling a year-end hike, the conviction is evaporating, with December expectations already sliding .

Bottom line: the ‘higher for longer’ trade is under siege. I’d be looking to stay long the front end of the curve and watch for further USD/JPY weakness, which already slid 1.1% on the news Reuters. If next month doesn’t show a sharp reversal, the conversation shifts from ‘when is the next hike’ to ‘how fast do they need to cut.’