We expect headline job gains cooled to 100k in July from 147k in June. Private payrolls likely improved following a sharp drop in June. Conversely, government jobs, which rose by a solid 73k in June, were likely flat in July. We expect the unemployment rate ticked up to 4.2% in July after a dip in the labor force participation rate drove a decline to 4.1% in June. We forecast average hourly earnings (AHE) rose 0.2% m-o-m. A negative calendar effect and a tick up in the average workweek to 34.3 likely weighed on July wage growth. Our own view is that the slowdown in the pace of payrolls growth is looking less concerning given that lower immigration has decreased the “breakeven” payroll growth rate that would keep the unemployment rate unchanged. Still, we see mainly downside risk to employment both in next week’s report and in coming months. Continuing jobless claims increased earlier this summer but have been flat in recent weeks. If the upward trend resumes in coming weeks, that would be a stronger indication of upside risk to the unemployment rate. Also, the unemployment rate would be higher if not for recent declines in the labor force participation rate. It is difficult to get a clear sense of employment in US currently. While anecdotally in an uncertain tariff environment, corporates will be shy of new capex, households might be hesitant to raise spending, wage growth could be anaemic due to corporates trying to save on earnings via lower employment costs, we are not seeing any sharp fall in NFPs. A consistent reading of less than 75k for few months and UR readings of 4.4-4.6% is needed to bring the employment mandate of Fed back into focus. But with strict immigration controls, UR is unlikely to shift back towards 4.5% levels. Hence, we believe NFPs have lost their ability to predict employment weakness in near term. We believe Fed will cut by 25 bps each in Sep and Dec followed by 75 bps cut in H1CY26. For same reasons, we like to receive 2yr & 1yr-1yr SOFR at current levels of 3.92% & 3.28 respectively. Markets are pricing in only 94 bps of cut till July’26 where as we expect 125 bps of cuts.
