June Jobs Report: Mixed Signals Cloud Fed Outlook as Markets Cheer Headline Beat

Markets responded positively Friday morning after the June jobs report delivered a stronger-than-expected headline gain of 147,000 nonfarm payrolls, comfortably beating the consensus estimate of 110,000. That was enough to ignite a rally in risk assets, aided by upside surprises in weekly initial jobless claims and the U.S. trade deficit data. Equities surged on the news, with investors interpreting the report as a sign of continued economic resilience without an imminent overheating risk.

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But a deeper look under the hood of the report revealed some growing fissures. Private sector job creation came in well below forecasts, adding just 74,000 jobs in June versus expectations of 105,000. That marks the weakest month for private employment since October 2024, and follows modest upward revisions to prior months: May was revised up by 5,000 to 144,000, and April by 11,000 to 158,000. The strength in June headline payrolls was largely thanks to a 73,000-job surge in government hiring—entirely at the state and local level in education—rather than broad-based private sector momentum.

Wage growth also came in softer than expected. Average hourly earnings rose 0.2% month-over-month, below the consensus forecast of 0.3%, and up 3.7% year-over-year, missing the 3.9% estimate. The average workweek dipped to 34.2 hours from 34.3 expected, another subtle sign of labor market deceleration. Factory jobs declined by 7,000, worse than the -5,000 expected and the third monthly decline in manufacturing employment in four months.

Despite the warts, markets took the headline gain at face value. The Dollar Index surged, gold prices dipped, and the yield curve steepened modestly as investors reassessed the probability of near-term rate cuts. Odds of a September cut fell to 75% from 92%, a notable shift even as the market still expects multiple rate reductions by year-end. The move in Treasuries was sharpest in the short-end, with the 2-year yield rising 12 basis points to 3.90%, while the 10-year yield gained 6.7 basis points to 4.36%.

Sector-level data underscored the narrowness of job creation. State government education added 40,000 jobs, with another 23,000 in local education. Health care continued to provide a consistent tailwind to employment growth, adding 39,000 jobs in June, roughly in line with the sector’s 12-month average. Hospitals (+16,000) and nursing/residential care facilities (+14,000) led the way, along with a 19,000-job gain in social assistance.

Elsewhere, the picture was more mixed. Manufacturing shed 7,000 jobs—another red flag for the goods-producing sector. Construction held steady with a 15,000-job gain, while professional and business services lost 7,000 jobs, including a further 2,600 drop in temporary help services, which have been trending lower for much of the past year. The leisure and hospitality sector added 20,000 jobs, down from prior months but still supportive of consumer-facing strength.

This unevenness paints a more nuanced picture of the labor market. While headline strength suggests the economy remains on firm footing, the underlying data shows softness in private hiring, flagging wage momentum, and a narrow reliance on a few stable sectors like health care and government to sustain payroll growth. The rise in the unemployment rate to 4.1%—from 4.0% previously—isn’t alarming in isolation, but it highlights that the labor market may be approaching an inflection point.

For the Federal Reserve, the report muddies an already complicated policy backdrop. While Fed officials have said they are waiting for more confirmation that inflation is easing sustainably, today's softer wage data may be welcomed. Still, the stronger headline number combined with sticky services inflation and last week's upside surprise in the PCE report suggests the path to rate cuts remains uncertain. Friday’s repricing in rate expectations reflects this: the Fed is no longer expected to act with urgency in September, and may prefer to wait for additional confirmation from July CPI and employment data.

In the meantime, risk markets are choosing to see the glass half full. With stocks pressing toward record highs and signs of broadening sector participation—particularly in financials, industrials, and tech—investors appear willing to ride the “not too hot, not too cold” narrative a while longer.

But with the private sector engine sputtering and wage growth decelerating, the Fed may find itself navigating a narrower runway into the fall. Any disappointment in inflation or job data over the next month could bring the September rate cut probability right back down to earth—or push it further out.