Weak Jobs Data Changes the Fed Conversation

Labor Data Misses Across the Board

Last week was a clean sweep of disappointing labor data, and each report made the labor market look a little weaker. Job openings fell to 7.36 million in June, below the 7.4 million expected. Hiring did improve and layoffs stayed low, so JOLTS wasn’t a disaster, but it reinforced the same “slow hire, slow fire” labor market we’ve been talking about for months. Employers still aren’t laying people off aggressively, but they also aren’t showing much urgency to add workers.

Then ADP missed by a much wider margin. Private companies added just 44,000 jobs in July versus the 75,000 expected, down sharply from 95,000 in June. Nearly all of the gains came from services, particularly healthcare, while goods-producing industries actually lost jobs. When most of the hiring is concentrated in just a handful of industries, that’s usually not a sign of a broad, healthy labor market.

Friday’s official jobs report was the real shock. Economists expected the U.S. to add roughly 80,000 jobs in July. Instead, payrolls fell by 23,000. The unemployment rate also surprised, dropping from 4.2% to 4.1% instead of holding steady as expected, but that wasn’t as positive as it looked. The decline was largely driven by workers leaving the labor force, and participation fell to 61.4%. In other words, unemployment fell partly because fewer people were actively looking for work, not because hiring suddenly improved.

That combination dramatically changed the Fed conversation. Coming into Friday, markets thought a September rate hike was more likely than not as inflation remained stubbornly above target and several Fed officials openly argued for tighter policy. After the jobs report, those odds fell below 50%. The Fed still has an inflation problem, which we'll learn more about this week when CPI numbers are released, but raising rates becomes much harder to justify if the labor market is already starting to crack. For mortgage rates, that shift is important because markets trade on what they think the Fed will do next. This week’s CPI and PPI reports now become the next major test.

Iran Peace Talks Seem To Be Already Stalling

Oil briefly fell below $75 a barrel last week as hopes grew that the U.S. and Iran were getting closer to a deal to reopen the Strait of Hormuz. After oil reached roughly $126 in April, seeing prices back below $75 was a very welcome sight for inflation and mortgage rates.

Unfortunately, the talks are already running into trouble. Iran is now demanding compensation, sanctions relief, the release of frozen assets and several other U.S. concessions before reopening the Strait. The two countries aren't even negotiating directly, and oil has already climbed back above $80 as optimism fades.

For rates, the goal hasn't changed. We need a lasting deal that reopens Hormuz and keeps oil prices lower for the long term. A few days below $75 is encouraging, but it won't meaningfully cool inflation if oil immediately climbs back above $80 every time negotiations hit another roadblock.

What Fed Members Said This Week

The timing matters here. Jeff Schmid spoke before Friday’s labor report and was firmly hawkish, saying inflation was still “too high” and that tighter policy may be needed to bring it back toward 2%.

Tom Barkin spoke after the weak jobs report and sounded much more cautious. He described the labor market as being in a “weak balance” and suggested the Fed has room to wait for more data before deciding whether another hike is necessary.

That contrast shows how quickly the conversation shifted last week. Before the jobs report, Fed officials were still openly making the case for higher rates. After it, the labor market became much harder to ignore.