Jobs Report Shows Cracks: Weak Hiring and Downward Revisions Keep Fed Cut Hopes Alive

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The July U.S. Nonfarm Payrolls (NFP) report delivered a mixed message for markets: while the headline job gain of 73,000 was weaker than expected, it was viewed as “better than feared” given recent worries—but sharp downward revisions to prior months painted a bleaker picture of the labor market’s underlying health. Nonfarm payrolls rose by 73,000, marking only modest growth and continuing the soft trend since April. The unemployment rate held steady at 4.2%, while average hourly earnings grew 0.3% month-over-month and 3.9% year-over-year, in line with forecasts. Importantly, sharp downward revisions to May and June’s gains—258,000 fewer jobs than initially reported—underscore the labor market’s loss of momentum. Despite the weak headline, equities staged a relief rally early, though they remain off intraday highs, while the 10-year yield slid 8 basis points to 4.32% as investors recalibrated expectations for Federal Reserve policy.

The key story was the softening jobs growth. The 73,000 gain fell short of the consensus for around 115,000 and was well below the pace seen earlier this year. Yet the market read the data as not disastrous, especially given that the unemployment rate held steady rather than rising further. Wage growth of 0.3% matched expectations, showing continued stability in earnings without a sharp acceleration that would alarm the Fed. The jobs market isn’t flashing outright recession, but the downward revisions to prior months underscore that conditions are cooling faster than headline numbers previously suggested.

Industry-level performance showed a clear divide between resilient and struggling sectors. Healthcare remained a pillar of strength, adding 55,000 jobs—well above its 12-month average of 42,000. Within that, ambulatory health services gained 34,000 and hospitals added 16,000. Social assistance contributed another 18,000 jobs, driven by a 21,000 increase in individual and family services. These defensive sectors continue to show structural growth regardless of the broader slowdown. By contrast, the federal government shed 12,000 jobs in July and has now lost 84,000 since January, weighing on public sector payrolls. Meanwhile, other major industries—including manufacturing, retail, construction, financial activities, and leisure and hospitality—showed little to no change, reflecting a stalling recovery in cyclical hiring.

The stock market reaction reflected relief more than enthusiasm. Investors initially bid equities higher on the view that the Fed may be inclined to lower rates at future meetings. The S&P 500 trimmed early losses, while the Nasdaq (tickers to watch: AAPL, MSFT, AMZN) rebounded modestly given that wage growth wasn’t hot enough to pressure margins. Financials (JPM, WFC, GS) underperformed as falling yields weighed on banks’ net interest income outlook. Healthcare stocks (UNH, HCA, CI) could see continued support given strong sector hiring trends, while retailers (WMT, TGT) and manufacturers (CAT, DE) may tread water amid flat industry employment. Notably, the Cboe Volatility Index (VIX) eased back after Thursday’s tariff-driven spike.

The bond market told a more dovish story. The 10-year Treasury yield tumbled 8 basis points to 4.32%, reversing much of the week’s earlier rise. Fed funds futures now imply a 40% probability of a September rate cut, up from 37% before the report, with odds likely to creep higher if upcoming inflation data shows tariff-related pressures easing. The dollar softened modestly against peers after a multi-day rally, while gold held gains near recent highs as traders priced in a more accommodative Fed path.

From a policy perspective, the report reinforces the Fed’s delicate balancing act. Chair Jerome Powell has stressed the importance of unemployment as the “main number you have to look at now.” With job growth slowing but not collapsing and wages steady, the Fed can afford patience. Still, the sharp downward revisions will raise questions about whether the labor market is weaker than it appears in real time. If August data confirm the trend, the probability of a September cut could rise substantially, especially with tariffs casting stagflationary shadows over the outlook.

For investor sentiment, the data offered just enough comfort to sustain risk appetite, though not enough to erase lingering worries. The fact that equities remain off session highs underscores the tension: investors welcome signs the Fed may have more room to cut, but they also recognize growth momentum is fading. Sector rotation favors defensive groups like healthcare and utilities, while cyclicals remain range-bound. For corporates, slower job growth could temper consumer demand into Q4, but the absence of wage-driven margin pressure offers relief to big employers.

In sum, July’s jobs report wasn’t strong, but it was better than feared—and that distinction mattered for markets. The modest gains and steady unemployment rate prevented a full-blown panic, while downward revisions keep the Fed on alert. Expect investor focus to stay locked on the next payrolls report and CPI release as the September FOMC decision comes into sharper view.