According to a research report from Soochow Securities Company Limited, July's US nonfarm payrolls unexpectedly turned negative. Looking ahead, as the short-term impulses from fiscal policy and the World Cup gradually fade, and the lagged effects of tighter financial conditions emerge, the US economy may experience a phased cooling in the third quarter of 2026. The firm anticipates that upcoming key data, including the July CPI, August CPI and nonfarm payrolls, and the annual benchmark revision for nonfarm payrolls, will continue to weaken the Federal Reserve's rate hike expectations, pushing US Treasury yields and the US dollar index lower, while providing support for gold prices.
Core Insights
July Nonfarm Payrolls: New Jobs Unexpectedly Turn Negative, Unemployment Rate Continues to Decline
The US recorded a net loss of 23,000 nonfarm jobs in July, against expectations for a gain of 80,000. The prior month's figure was revised lower from 57,000 to 20,000, with a cumulative downward revision of 103,000 over the previous two months. The three-month average declined from 77,000 to 20,000. Similar to the July ADP private employment report, US nonfarm payrolls ended their brief recovery trend and returned to a downward trajectory. Meanwhile, the unemployment rate unexpectedly fell back to 4.1%, against expectations and the prior reading of 4.2%. Structurally, similar to the previous month, the decline in the unemployment rate was driven more by a contraction in labor supply. Following the data release, despite the unexpected negative nonfarm payrolls figure, the market did not price in a recession due to the surprising drop in the unemployment rate. The prevailing narrative remained one of monetary easing (cooling rate hike expectations): gold, US stocks, and copper rose, while the US dollar index and US Treasury yields fell. The implied probability of a Fed rate hike in September, as measured by fed funds futures, fell from 57% before the data release to 44%. The total expected rate hikes for the year declined from 1.35 to 1.15. US Treasury yields and the US dollar index declined, while gold and commodities rose.
Employment Structure: The Cooling in Labor Demand is Broad-Based, Not Structural
On the business side, goods-producing industries added 25,000 jobs, with 22,000 coming from the construction sector. Service-providing industries added 50,000 jobs, but sectors like trade and transportation, financial activities, and leisure and hospitality saw month-over-month declines in employment. The unexpected negative July nonfarm payrolls figure was driven by a combination of noise, impulse factors, and trend factors. Regarding "noise," local government education employment fell by 50,000 in July, a major source of the decline in government sector employment. This resulted from the combined effects of summer seasonal effects and financial pressure on public schools, with the former introducing some "noise." Concerning impulse factors, jobs related to the World Cup in hotels and restaurants, as well as general local government administrative positions, both declined in July. Leisure and hospitality employment fell by 40,000, following a decline of 43,000, partly reflecting the unwinding of temporary World Cup-related jobs. As for trend factors, based on the three-month moving average trend and employment diffusion indices, the US employment situation has weakened. Looking at the horizontal trend, US nonfarm payrolls have declined for four consecutive months from a peak of 214,000 in March. Combined with the downward revision of previous data and the latest negative figure, the downward trend in employment is becoming clearer. Vertically, excluding the World Cup-related weakening in leisure/hospitality and non-education local government sectors, as well as the seasonal distortion in local government education, employment in residential construction, non-durable goods manufacturing, retail trade, and financial activities all turned negative. The one-month employment diffusion index, which measures the breadth of employment, also fell from 53.2% to 51.8%. Furthermore, data quality improved significantly this month, with the initial survey response rate rising from a low of 54.4% last month to 69.7%, the highest since May 2023, excluding the anomaly of September 2025 (government shutdown disruption).
Supply-Demand Structure: The Decline in the Unemployment Rate Stems from Weak Supply, Not Strong Demand
The July unemployment rate unexpectedly fell from 4.19% to 4.09%, versus expectations of 4.2%. Similar to the previous month, the unexpected decline in the unemployment rate was almost entirely due to a drop in the labor force participation rate. The household survey showed that employment fell by 87,000 in July, the number of unemployed fell by 178,000, and the total labor force decreased by 264,000. Adding in the natural population increase of 116,000, the non-labor force population grew by 381,000. Consequently, the unemployment rate, employment rate, and labor force participation rate all weakened. Among the types of unemployed, re-entrants saw the largest decline, corresponding to a reduction in new labor force entrants. Temporary layoffs increased significantly, corresponding to layoffs from World Cup temporary jobs. Within the decline in labor supply, the non-seasonally adjusted foreign-born labor force fell sharply in June and July, possibly related to the recent intensification of US enforcement against illegal immigrants.
Outlook and Strategy Implications: Economic Data for Q3 2026 Likely to Remain Weak, with Significant Room for Further Cooling in Rate Hike Expectations
Overall, the July nonfarm payrolls data turned negative due to the combined effects of seasonal noise, the fading of the World Cup impulse, and trend factors. The current trend of weakness on both the supply and demand sides of the US labor market, leading to a relative equilibrium, has not changed. This corresponds to a pattern of "shrinking quantity (lower nonfarm payrolls) but stable prices (unchanged unemployment rate and hourly wages)". Judging by the asset price movements that evening, the market's response to the monetary easing trade was relatively restrained, still pricing in one rate hike for the year. This suggests the market is waiting for new data, such as upcoming inflation figures. Looking ahead, consistent with our previous outlook, as the short-term impulses from fiscal policy and the World Cup gradually fade, and the lagged effects of tighter financial conditions emerge, the US economy may experience a phased cooling in the third quarter of 2026. This cyclical pattern will be similar to 2024-2025: higher US Treasury yields and tighter financial conditions in Q2 dampened demand, causing nonfarm payrolls to surprise to the downside in Q3, leading to monetary easing by the Fed in September. However, this time, it will not lead to a September rate cut but rather disprove a September rate hike. Therefore, we expect upcoming key data, including the July CPI, August CPI and nonfarm payrolls, and the annual benchmark revision for nonfarm payrolls, to continue to weaken the Fed's rate hike expectations, pushing US Treasury yields and the US dollar index lower, and providing support for gold prices.
Risk Warning
Trump's policy changes could be more drastic than anticipated. US growth and inflation overheating could cause the Fed to turn more hawkish than expected. The Fed maintaining high interest rates for an extended period could trigger a liquidity crisis in the financial system.
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