Rosy headline jobs data to keep Fed on pause, but not all good under the hood

On the surface, the June employment report was very strong. Payrolls were much higher than expected and there was a significant improvement in the unemployment rate. The rosier headline numbers will help to push out the expectations of a Fed cut, but under the hood, this print overall confirms are view that the softening in the labor market continues. There was very little hiring outside of the business cycle-agnostic sectors of healthcare and government. The decrease in the unemployment rate is likely a result of limited layoffs and the decrease in immigrants from the labor force. The size of the immigrant work force, which will be an increasingly relevant topic in the coming months, shrank in June – the third straight decline. As hiring slows (the hiring rate from the JOLTS report earlier this week remains historically low), the slowdown in immigration flows should help to prevent job market from loosening too much even as demand for workers wanes with the slowing economy. Given the wide swings in immigration over the past few years, it’s hard to pin down exactly the rate of payroll gains that is consistent with a stable labor market and keeps up with population growth, but the three-month moving average of 150k, is likely at the top of that range. With the unemployment rate moving south, this print will help to confirm that the labor market is currently , in Powell’s words, “solid.” We maintain our view that the Fed will wait until the peak of tariff induced inflation passes before cutting, likely at the October meeting. This will kick off a cutting cycle that will end when the terminal rate of 3% is reached.