The US jobs report for July presents a mixed picture. Non-farm payrolls increased by 187k, slightly below the expected 200k, and there were 49k downward revisions.

While manufacturing employment fell by 2k, private sector employment rose by a total of 172k, with one-third of the gains coming from the healthcare sector. The establishment survey, which questions employers, provided this data.

On the other hand, the household survey showed more strength, as the unemployment rate dropped from 3.6% to 3.5%, with a rise of 268k in employment and a decrease of 116k in unemployment.

The Federal Reserve is likely to remain cautious given the tight jobs market

Notably, average hourly earnings rose by 0.4% month-on-month (4.4% year-on-year), surpassing the expected 0.3% (4.2% year-on-year) increase.

The participation rate remained steady at 62.6%. The market seems to be focusing more on the wage and unemployment figures rather than just job numbers, which is reasonable.

The challenge lies in managing stickier wages and a tight jobs market while aiming to return inflation to the 2% target. However, this contrasts with some evidence from the Fed’s own Beige Book report, which suggested that wage increases were returning to pre-pandemic levels.

The Employment Cost Index, a broader measure of labor costs, was also lower, indicating that any market movements should be relatively small.

One area of disappointment in the household employment survey is that the strength in employment was driven by part-time jobs. Part-time employment rose by just under 1 million last month, while full-time employment fell by nearly 600k.

While wage growth remained robust, the shift from full-time to part-time work may result in lower household incomes overall.

Considering the report, there appears to be no immediate need for the Fed to accelerate interest rate hikes in September. The Fed has signaled a desire to tighten policy gradually, and this report aligns with the cooling of the labor market.

All attention will now turn to CPI and PPI data, where expectations of further dampening talk of a September rate hike are likely, as only minimal pricing of 4bp or 5bp is currently factored in.

Moreover, the increase in Treasury yields and the dollar following the Fitch downgrade and the US Treasury funding announcement strengthens the conviction that the Fed may not need to raise interest rates further.

These market moves, combined with increased volatility, are tightening monetary conditions and could lead to higher mortgage rates and corporate borrowing costs.

The Federal Reserve Senior Loan Officer Opinion survey also suggests further tightening of lending conditions in 3Q, which might result in negative lending growth.

This combination of higher borrowing costs and reduced credit availability could act as a significant headwind for economic activity, helping to bring inflation down to 2% next year and maintaining it at that level.