Weak US jobs report cools Fed hike bets and knocks the dollar

The US economy added just 57,000 jobs in June, far short of the roughly 110,000 economists expected and down from a downwardly revised May. Prior months were also cut back sharply, with combined April and May revisions trimming employment gains by tens of thousands. The unemployment rate slipped to 4.2%, but the drop was driven by people leaving the workforce, as the labour force participation rate fell to its lowest since early 2021.

The reaction in rate markets was swift. Traders had been positioning for possible tightening after the Fed under new Chair Kevin Warsh turned notably hawkish in June, but the soft payrolls print took a September move largely off the table. According to CME FedWatch, the odds of a hike at the late-July meeting collapsed, with a hold now the strong favourite. The policy-sensitive 2-year Treasury yield fell as the data eased near-term pressure to act.

The dollar index slid and the greenback traded near a two-week low, with weakness compounded by the recent slide in oil prices that has taken some heat out of inflation fears. Even so, the picture is not one-sided: Warsh has stressed the Fed remains committed to returning inflation to 2%, core PCE was tracking well above target, and some economists still argue hikes later this year cannot be ruled out. The next signposts are the July FOMC meeting and upcoming inflation data.