Weak US Jobs Report Dampens Rate Cut Fantasies on Stock Markets

The unemployment rate fell slightly in June to 4.2 percent, from 4.3 percent in May. Economists had expected an unchanged figure of 4.3 percent. According to the report, however, the decline is mainly explained by lower labor force participation and is therefore not a sign of a genuine improvement in the labor market situation. Weekly initial claims for unemployment benefits, meanwhile, fell to 215,000—slightly better than the forecast 220,000.

Commerzbank economist Bernd Weidensteiner said the hoped-for stabilization of job gains at a higher level had failed to materialize. "Die erhoffte Stabilisierung der Jobgewinne auf einem höheren Niveau sei ausgeblieben, der Druck für eine Zinserhöhung auf der Fed-Sitzung Ende Juli lasse weiter nach," Weidensteiner said. At the same time, he stressed: "Wir gehen für dieses Jahr weiter von unveränderten US-Leitzinsen aus." This led the majority of market participants to shift to expecting a rate cut.

Fed Under Growing Rate Cut Pressure

Before the release of the report, futures market traders had considered a Fed rate hike in October most likely. Following the weak data, that expectation shifted significantly further out, to December. Traders are now increasingly pricing in the possibility that the US Federal Reserve could cut rates for the first time in this cycle at its meeting at the end of July, in order to counter a further cooling of the economy.

Equity Markets Rise Despite Weak Data

The reaction on US equity markets was cautiously positive. The Dow Jones Index rose 0.5 percent to 52,559 points. The S&P 500 gained 0.4 percent, while the Nasdaq indices rose as much as 0.2 percent. Nvidia in particular advanced, with a gain of 0.4 percent, and Qualcomm rose by 1.1 percent. Alphabet shares, however, dipped slightly by 0.1 percent after the European Court of Justice in Luxembourg confirmed a record fine of 4.1 billion euros against Google and its parent company Alphabet for unfair anti-competitive practices.

Gold Benefits, Oil Remains Under Pressure

On the commodity markets, gold benefited from the weak US jobs report. The price of the precious metal rose 2.3 percent to $4,123 per troy ounce, having stood at $4,065 before the data release. Gold is regarded as a classic safe haven in times of economic uncertainty and also benefits from the prospect of lower real interest rates.

The oil market, meanwhile, continued to come under downward pressure. The Brent benchmark lost a further 1.2 percent to $70.73 per barrel, extending the previous day's losses. Soojin Kim of Bank MUFG commented: „Die Ölpreise dürften weiterhin unter Abwärtsdruck stehen, da sich das Angebot weiter normalisiert und geopolitische Risikoprämien abgebaut werden, auch wenn Rückschläge bei den Verhandlungen oder erneute Sicherheitsvorfälle weiterhin zu Phasen erhöhter Volatilität führen könnten." The price of the US WTI grade stood at $67.78.

Dollar Weakens

On the foreign exchange market, the dollar index fell by 0.6 percent following the disappointing employment figures. A weaker US dollar can help improve the export prospects of American companies, but at the same time makes it harder to contain inflation. The yield on ten-year US Treasuries remained virtually unchanged at 4.48 percent, suggesting that the bond market interprets the weak data as a sign of economic cooling rather than a harbinger of recession.

According to Weidensteiner, the FIFA World Cup, whose start fell within the survey period of the labor market data, did not lead to any unexpected job growth. The World Cup-related special effects thus failed to materialize, making the already weak underlying trend even more apparent. Wages, meanwhile, developed as expected, without providing any new inflation impulses.

US markets remained closed on Friday due to Independence Day on July 4. Only a shortened trading session took place on the US bond market on Thursday. As a result, investors had to position themselves for the weak economic data already on Thursday, without a full trading day being available for a complete price reaction.

Diplomatic Progress in Doha

In the diplomatic arena, meanwhile, a spokesperson for the Qatari Ministry of Foreign Affairs announced via the platform X that Qatari and Pakistani mediators had held separate talks in Doha with US and Iranian negotiators and had made positive progress on issues relating to a Memorandum of Understanding. This news was closely followed in the market, particularly with regard to the development of oil prices, as a possible easing of the conflict with Iran could further increase supply on world markets.

Overall, the weak June report makes clear that the US labor market has lost momentum over the course of the year so far. If job growth also falls short of expectations in the coming months, the pressure on the Federal Reserve to correct the monetary policy tightening of recent years earlier than planned is likely to increase further.

In the coming weeks, attention will now turn to the next economic data, in particular the inflation rate and wage developments. Should inflation decline more sharply than expected, this would further bolster the arguments for a rate cut. At the same time, observers caution against over-interpreting the June data, as special effects and the summer vacation season can limit the informational value of monthly fluctuations.

In the end, it should be noted: The US jobs report for June dashed hopes of a stabilization of employment at a higher level and thus recalibrated monetary policy expectations. While equity markets managed slight gains despite the weak data, the reaction on bond and currency markets shows that investors are increasingly taking the risks of a further economic cooling seriously.

The precise development in the coming months will determine whether the Fed will continue on the monetary policy course adopted in June or whether the weakening labor market data will trigger an imminent turn in interest rate policy.