U.S. Employment (July 2026)

Payrolls disappoint in July, but the unemployment rate falls to 4.1% 

• Nonfarm payrolls declined by 23k in July, well below the Bloomberg consensus forecast calling for a gain of 80k. The prior two months were revised lower by a total of 103k – pushing the three-month average down to 20k (from 77k in June). 
• Government hiring contracted by a sizeable 53k – largely driven by a sharp pullback in local government hiring.  
• Meanwhile, private sector hiring looked less dire – adding 30k new positions.  The bulk of the gains were concentrated in health care & social assistance (+22.6k) and construction (+22k). Retail trade (-19.4k), financial services (-14k) and leisure & hospitality (-40k) all recorded job losses.  
• In the household survey, the unemployment rate declined for a second consecutive month – falling to a thirteen-month low of 4.1%. However, the pullback was due to another decline in the labor force (-264k). The labor force participation rate fell by another tick and currently sits at 61.4% – its lowest level since February 2021.  
• Average hourly earnings rose by 0.1% month-on-month (m/m), pushing the year-ago measure to a five-year low of 3.2%.  

Key Implications

• Overall, this was a soft report, but perhaps not as dire as suggested by the headline payrolls print. The sharp decline in local government hiring is unlikely to be repeated next month, while some of the pullback in leisure & hospitality could be related to giveback following stronger hiring ahead of the World Cup. Moreover, the large downward revisions to prior months reinforce our view that hiring earlier in the year had been overstated. After the revisions, monthly payroll gains are now running closer to the breakeven rate.  
• This morning's softer employment report helped to quiet the noise of a September rate hike. Treasury yields across the curve were lower following the release, with Fed futures now only pricing in 10 basis points of hikes for September. The focus now shifts to next week's CPI report, where we expect a milder print to provide further reassurance that the effects of the supply shocks are fading, reinforcing our view that the Fed is likely to remain on hold.  

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