NEWS

In a notable shift in U.S. economic expectations, fresh labor market data revealed a sharper-than-anticipated slowdown, prompting markets to ramp up bets on an imminent Federal Reserve interest rate cut.

According to estimates from LSEG, the probability of a rate cut at the July FOMC meeting surged to 27%, up from 23% before the data release, and just 20% prior. For September, markets are now almost fully pricing in a 25-basis-point cut.

ADP Shocks Markets: Private Sector Sheds 33,000 Jobs

Private payrolls unexpectedly contracted by 33,000 in June, according to ADP data released Wednesday – the first monthly job loss since March 2023. This figure sharply contrasts with economists’ expectations of a 100,000 job gain.

Adding to the downbeat tone, May’s job growth was revised down to just 29,000 from a previously reported 37,000.

“While layoffs remain rare, a pullback in hiring and a reluctance to replace departures led to net job losses,” said Nela Richardson, Chief Economist at ADP.

All Eyes on Official Nonfarm Payroll Report

Despite the ADP report’s significance, investors await the official government nonfarm payrolls report, due Thursday. Economists forecast a 110,000 job increase in June and expect the unemployment rate to tick up to 4.3% from 4.2%.

Weekly jobless claims data will also be released Thursday, with estimates hovering around 240,000 initial claims. The reports come during a holiday-shortened trading week, as markets close early on Thursday for Independence Day and remain shut Friday.

Services Sector Leads Decline

The losses were concentrated in the services sector, particularly:

Professional and business services: -56,000 jobs

Education and health services: -52,000 jobs

Financial activities: -14,000 jobs

Meanwhile, goods-producing industries helped offset the broader decline:

Manufacturing and mining added 32,000 jobs

Overall services employment dropped by 66,000 jobs

Geographic and Company Size Breakdown

Regionally, the Midwest and West saw the steepest job losses, shedding 24,000 and 20,000 jobs respectively. The Northeast recorded a smaller drop of 3,000, while the South was the only region to post job growth, adding 13,000 jobs.

In terms of company size:

Small businesses (fewer than 20 employees) lost 29,000 jobs

Large enterprises (500+ employees) gained 30,000 jobs

Wage Growth Slows Slightly

Annual wage growth also slowed marginally compared to May:

Pay increases for job stayers dipped to 4.4%

Pay growth for job changers declined to 6.8%, down from 7%

S&P 500 Resilient Despite Labor Weakness

Despite labor market concerns, the S&P 500 Index has climbed more than 4% year-to-date, marking a strong rebound in Q2. The rally reflects optimism that softer employment data could lead to more dovish Fed policy in the months ahead.