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Payrolls Fell 23,000, Yet Stocks Hit a Record — Can Wednesday’s CPI Keep the Rally Going?

The U.S. unexpectedly lost 23,000 jobs in July, but the S&P 500 still closed at a record high.

Why? Investors interpreted weaker employment as reducing the likelihood of another Federal Reserve rate hike. Wednesday’s July CPI will now determine whether that “bad news is good news” rally can continue.

Recent Economic Data: Cooling Inflation, Weakening Jobs

July 14 — June CPI

* Headline CPI: -0.4% MoM, +3.5% YoY

* Core CPI: 0.0% MoM, +2.6% YoY

* Gasoline: -9.7% MoM

* Shelter: +0.1% MoM

Inflation cooled sharply, although much of the improvement came from lower energy prices.

July 30 — June PCE

* Headline PCE: -0.1% MoM, +3.7% YoY

* Core PCE: +0.1% MoM, +3.3% YoY

* Real consumer spending: +0.4%

The Fed’s preferred inflation gauge improved monthly, but annual inflation remained above its 2% target.

August 4 — June JOLTS

* Job openings: 7.4 million

* Hiring: 5.3 million

* Quits: 3.2 million

* Layoffs: 1.8 million

Falling openings and a low quits rate suggest companies and employees are becoming more cautious—a “low-hire, low-fire” labour market.

August 5 — July ADP

* Private employment: +44,000

* Pay growth for job-stayers: +4.4% YoY

* Pay growth for job-changers: +7.0%

Private hiring remained positive but weak, while wage pressure had not disappeared entirely.

August 7 — July Nonfarm Payrolls

* Payrolls: -23,000 versus approximately +80,000 expected

* Unemployment rate: 4.1%, down from 4.2%

* Labour-force participation: 61.4%

* Average hourly earnings: +0.1% MoM, +3.2% YoY

* May and June payrolls revised down by a combined 103,000

The lower unemployment rate was partly caused by fewer people participating in the workforce—not purely stronger employment.

Overall, the message is clear: inflation is easing, but employment is weakening more quickly.

Why Did Stocks Rally?

Weak employment lowered expectations for another Fed rate hike. This pushed Treasury yields down and supported technology and other high-valuation stocks.

Investors currently believe the economy is slowing enough to restrain the Fed—but not enough to enter a recession.

Wednesday’s CPI will test that narrow “Goldilocks” scenario.

What Will Wednesday’s CPI—and the Hormuz Disruption—Show?

The CPI released on Wednesday, August 12, covers prices during July 2026. Prices are collected throughout the month, so it reflects July’s average conditions rather than the situation on one specific day.

This matters because the Strait of Hormuz was neither fully normal nor completely closed throughout July.

Shipping partially recovered following the June reopening agreement, but traffic remained well below normal. Renewed hostilities later restricted flows again and pushed oil prices higher.

Therefore, July CPI should capture:

* Early-July relief from the partial reopening

* The subsequent rebound in oil and gasoline prices

* Some increase in transportation and distribution costs

* Only part of the latest escalation

In other words, the sharp energy decline that helped June CPI may not repeat in July.

However, Wednesday’s report will not capture the full impact of August’s renewed Hormuz tensions. If shipping remains restricted and oil prices stay elevated, the effect could be more visible in August CPI, released in September.

Markets expect approximately:

* Headline CPI: +0.1% MoM, +3.4% YoY

* Core CPI: +0.2% MoM, +2.5% YoY

If CPI Is Higher Than Expected

A hot CPI would challenge the current rally:

* Rate-hike expectations could rise again

* Treasury yields and the U.S. dollar could strengthen

* Technology and high-valuation stocks could retreat

* Stagflation concerns could increase as inflation rises while employment weakens

The market may tolerate an energy-driven increase because oil prices can reverse. A broad rise in shelter and core services would be more worrying.

If CPI Is Lower Than Expected

A soft CPI would reinforce the bullish narrative:

* Rate-hike expectations could decline further

* Treasury yields could fall

* Technology, bonds and rate-sensitive assets could benefit

* The Fed would have more flexibility if employment weakens further

However, extremely weak inflation accompanied by deteriorating consumer demand could eventually shift attention from interest rates to recession risk.

My Take

Wednesday’s CPI does not need to be exceptionally low. It mainly needs to avoid a meaningful upside surprise.

An in-line or softer reading would support the current narrative: inflation is gradually cooling, employment is weakening, and the Fed can remain patient.

A hot reading would create a far more difficult combination—weak growth, persistent inflation and fewer options for the Fed.

Watch core CPI and shelter closely. Hormuz-related energy inflation may be temporary, but persistent core-services inflation would be much harder for both the Fed and the stock market to ignore.

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