U.S. Treasuries rallied on August 7, 2026, after data showed employers cut 23,000 jobs in July, a sharp miss against economist forecasts for roughly 85,000 new positions. The report immediately reshaped bets on the Federal Reserve’s next move, sending yields lower and pushing traders to slash the odds of a September rate hike.
Key Takeaways
- Employers cut 23,000 jobs in July, missing forecasts for roughly 85,000 new positions.
- May payrolls were revised down 66,000 and June’s down 37,000, totaling 103,000 fewer jobs than first reported.
- The two-year Treasury yield fell eight basis points to 4.16% and the 10-year rate dropped six basis points to 4.61% on August 7, 2026.
- Kalshi odds of the Fed holding rates steady in September jumped to 65%, while CME FedWatch odds rose to 60%.
- The unemployment rate fell to 4.1% from 4.2% even as the labor force participation rate slipped to 61.4%.
The reversal matters because it flips the market’s working assumption almost overnight, showing that a single weak data point can now outweigh months of steady labor-market readings in the eyes of rate traders. A day earlier, futures traders saw roughly even odds of a rate increase; by Friday afternoon, most were betting the Fed holds steady, signaling that investors now treat labor-market softness, not inflation, as the sharper near-term risk to price into bonds.
July Payrolls Contracted While Prior Months Were Revised Down Hard
The Bureau of Labor Statistics figures were worse than the headline number alone suggests. The economy did not just miss estimates, it contracted, and prior months were revised down hard: May’s initial gain of 129,000 jobs was cut to 63,000, and June’s 57,000 was cut to 20,000. Combined, that is 103,000 fewer jobs than previously reported, meaning the labor market had been weaker for months than anyone realized in real time.
Local government led the losses, shedding 50,000 positions, while retail trade, including warehouse clubs and general merchandise stores, lost 19,000 jobs. Healthcare was the outlier, adding 22,000 positions, underscoring how uneven the pain has been across sectors rather than broad-based.
Two-Year Yield Drops Eight Basis Points as Rate Hike Bets Unwind
The reaction in rates markets was immediate and sizable for a single trading session. The two-year Treasury yield, which tracks near-term Fed policy expectations most closely, fell eight basis points to 4.16%, while the 10-year rate dropped six basis points to 4.61%. Stocks moved higher over the same stretch as investors repriced the odds of tighter policy.
| Metric | Before Jobs Report | After Jobs Report |
|---|---|---|
| Kalshi odds of Fed holding rates in September | About 50-50 for hike or hold | 65% |
| CME FedWatch odds of Fed holding rates in September | 45% (Thursday), one-in-three a week earlier | 60% |
| Two-year Treasury yield | Prior close | 4.16%, down 8 basis points |
Those numbers matter beyond the trading desk. A rate hold in September would mark a pause after three Federal Open Market Committee members dissented at the July meeting, arguing the Fed should have already raised rates given higher energy prices tied to the U.S.-Iran conflict. The jobs data complicates that argument considerably, since raising rates to cool an economy that just shed jobs carries obvious risk.
Falling Labor Force Participation, Not Hiring, Drove the Unemployment Rate Lower
One of the more confusing wrinkles in Friday’s release is that the unemployment rate actually improved, edging down to 4.1% from 4.2%, even as payrolls shrank. That drop came alongside a decline in the labor force participation rate to 61.4%, meaning fewer people were counted as looking for work rather than more people finding jobs.
Jeff Schulze, Head of Economic and Market Strategy at ClearBridge Investments, described the report as a broad disappointment that reverses the trend of positive labor-market momentum earlier in the year. Schulze noted that the combination of negative headline job creation and downward revisions stands in contrast to the lower unemployment rate, creating “conflicting signals for the Fed” about the labor market’s overall health. He added that the data should be modestly supportive for risk assets as yields decline and expectations for rate hikes get pushed out. His point lands on the core tension facing policymakers: the headline data says the economy is cooling, but the jobless rate says otherwise, and the Fed has to weigh both.
ADP’s Private Payroll Miss Two Days Earlier Foreshadowed the Government Figures
The weak government report did not arrive without warning. ADP’s National Employment Report, released Wednesday, showed private payrolls rose by just 44,000 in July, well below the 95,000 added in June and the 75,000 economists had penciled in. Dr. Nela Richardson, chief economist at ADP, said the rapid pay growth among job-changers points to “supply constraints in parts of the labor market,” while noting that hiring patterns are shifting as employers adjust to changing macroeconomic conditions. That private-sector miss foreshadowed Friday’s government figures and gave traders a two-day head start on repricing rate expectations.
July CPI on August 12 Will Determine Whether the Labor Signal Holds
The jobs report has not settled the debate; it has shifted the terms of it. Investors are now waiting on the July Consumer Price Index due August 12 to see whether inflation data overrides the labor-market signal. Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management, said the weak payrolls print may ease pressure on the Fed to raise rates in September but that inflation data due next week will “still likely be the deciding factor.” She added that a hotter-than-expected CPI reading could override a cooler labor market and revive calls for hikes within the Fed.
The market has not abandoned the idea of hikes later this year, either. Even after Friday’s repricing, CME’s FedWatch tool still shows a 55% chance of a hike in October and nearly 75% by December, a reminder that one soft jobs print reshuffles near-term odds without erasing the broader case some Fed officials have made for tighter policy amid elevated energy prices.
Disclaimer: This article is for informational purposes only and does not constitute financial advice, investment guidance, or a recommendation to buy or sell any security. Consult a qualified financial advisor before making investment decisions.
FAQs
Why Did Treasury Yields Fall After the July Jobs Report?
Yields fell because traders interpreted the weak payroll numbers as reducing the chance the Federal Reserve raises rates in September. The two-year Treasury yield, which is most sensitive to near-term Fed policy, dropped eight basis points to 4.16%.
How Many Jobs Did the U.S. Economy Actually Lose in July 2026?
The Bureau of Labor Statistics reported a loss of 23,000 jobs in July, compared with economist forecasts for a gain of roughly 85,000. Prior months were also revised down by a combined 103,000 jobs.
Why Did the Unemployment Rate Drop If the Economy Lost Jobs?
The unemployment rate fell to 4.1% from 4.2% partly because the labor force participation rate dropped to 61.4%, meaning fewer people were counted as actively looking for work. Fewer job seekers can lower the jobless rate even without new hiring.
What Did the ADP Employment Report Show Before the Government Data?
ADP’s National Employment Report, released two days earlier, showed private payrolls rose by only 44,000 in July, below the 95,000 added in June and the 75,000 economists expected. ADP chief economist Dr. Nela Richardson said hiring patterns are shifting as employers react to changing macroeconomic conditions.
What Are the Current Odds of a Fed Rate Hike in September 2026?
After the jobs report, Kalshi showed a 65% chance the Federal Reserve holds rates steady in September, while CME’s FedWatch tool put the odds of a hold at 60%. Both figures rose sharply from roughly even odds the day before.
Could the Fed Still Raise Rates Later in 2026?
CME’s FedWatch tool still shows a 55% chance of a rate hike in October and almost a 75% chance by December, even after the weak jobs data. The upcoming July Consumer Price Index report on August 12 is expected to weigh heavily on that decision.
Which Sectors Lost the Most Jobs in July?
Local government shed 50,000 positions and retail trade, including warehouse clubs and general merchandise stores, lost 19,000 jobs. Healthcare was an exception, adding 22,000 positions during the same month.
