Markets Rally as Downbeat Payrolls Quell Rate Hike Angst, Offset Iran Worries: Aug. 7, 2026

Markets are rallying as a colossal miss on nonfarm payrolls is quelling rate hike angst while offsetting the impact of confusion regarding negotiations that could partially open the troubled Strait of Hormuz. Indeed, the fourth consecutive month of weakening hiring is providing Fed Chair Warsh with an opportunity to extend a pause because this morning’s release, the first publication depicting job losses during his tenure, justifies increased attention to the employment side of the central bank’s dual mandate. Previously, the chief maintained an unwavering focus on pushing inflation down to the organization’s 2% target, however, this print illustrates the risks associated with restricting monetary policy to constrain cost forces. Meanwhile, loosening financial conditions resulting from today’s weak labor data is bolstering Wall Street enthusiasm as stocks advance broadly amidst the four major benchmarks climbing alongside 9 of the 11 principal sectors and all subcategories. Additionally, the yield curve is descending in bull-steepening fashion led by the shorter-tenors as fixed-income watchers have pushed their forecast for the beginning of a fresh tightening cycle from September to October/December. But the Treasury gains are being limited by elevated crude prices in response to an ongoing lack of clarity in Middle East talks. Investors have been waiting for a follow through announcement about the critical waterway following President Trump and his Cabinet members signaling progress with Tehran and Oman. Elsewhere, commodities, cryptocurrencies and prediction markets are catching bids due to stronger animal spirits paired with continued foreign affair uncertainties. In other areas, volatility protection instruments are seeing lighter premiums as lessening hedging demand weighs on put option values.

Jobs Contract

The US economy lost jobs in July for the first time since February as it’s becoming increasingly evident that labor constraints are capping payroll gains. Moreover, despite a nationwide decrease of 23k workers, which was way under the expected 80k and June’s downwardly revised 20k, unemployment fell from 4.2% to 4.1% during the month. In July, 264k people dropped out of the labor force amidst a participation rate that fell to its lowest level since 1976 when excluding the pandemic era. This decline results, in part, from immigration restrictiveness weighing on the number of prospective employees and placing downward pressure on the joblessness rate because the size of the workforce is the denominator in the calculation.

Despite the overall weakness, 9 of the 14 major sectors added jobs, led by private/education/health services, construction, professional/business services and information, which gained 25k, 22k 18k and 11k workers, while transportation/warehousing, other services, utilities, manufacturing and wholesale trade expanded at more modest degrees of 10k or less. Conversely government, leisure/hospitality, retail, finance and mining/logging lost 53k, 40k, 19k, 14k and 2k. Meanwhile, wage pressures were anemic, potentially signaling cooling labor demand that hasn’t been present in the other surveys, with average hourly earnings rising just 0.1% month over month (m/m) and 3.2% year over year (y/y), beneath the 0.3% and 3.5% expectations and the 0.3% and 3.4% figure from June.

Middle East Progress Needed for Rates To Plunge Further

Despite nonfarm payrolls puking an awful headline number, the fixed-income complex is balancing economic slowdown risk with heavy inflation expectations as there continues to be a lack of Middle East clarity. Treasuries have pared gains meaningfully into the afternoon by about five basis points, as the potential for accelerating oil prices caused by an escalation in geopolitical tensions remains top of mind for Wall Street heading into the weekend. Indeed, foreign affairs are trumping contracting jobs, while a reduction in the unemployment rate has quelled recession worries as it signals a labor supply rather than demand problem. Still, decreases in aggregate employment amidst steady joblessness is a trend that justifies lighter interest rates as it does pose a cyclical headwind for the current expansion. It could be a positive story for stocks and corporate earnings too, as long as consumer spending can remain buoyant in the face of less people working due to demographic and immigration issues.

International Roundup

China Trade Surplus Slips but Surpasses Expectations

China’s trade surplus sank from $125.6 billion in June to $112.5 billion last month but still exceeded the economist consensus estimate for exports to exceed imports by $108.6 billion. Exports expanded by 23.9% y/y, a deceleration from 27% in the preceding month but stronger than the 22.2% estimate. Imports experienced a stronger deceleration, falling from June’s 36% y/y growth to 27.5% and missing the 27.9% estimate.

Broadly speaking, China’s exports have been boosted by intensifying demand for artificial intelligence technology. Exports to the US also surged last month as US buyers sought to build inventory prior to President Trump launching new taxes on imports.

Canada Payroll Growth Surprisingly Strong

Payrolls in Canada added 75.1k workers in July, substantially surpassing the economist consensus expectation for only 17.5k individuals to start punching time clocks. Employment growth accelerated from the 18.2k additions in June and pushed the unemployment rate down from 6.5% to 6.4%, its lowest level in two years, according to Statistics Canada. Economists anticipated a repeat of June’s rate. The unemployment rate fell despite the portion of the population that is actively employed or seeking work, or the labor participation rate, climbing 0.1 point to 65.1. Full-time workers accounted for 38.6k of the July payroll additions, up from 600 in June. Hiring of part-time workers also jumped, climbing from 17.5k in June to 36.6k.

Sectors with expanding payrolls and the extent of their changes were as follows:

• Wholesale and retail trade, 21,000
• Finance, insurance, real estate, rental and leasing, 18,000
• Professional, scientific and technical services, 17,000
• Construction, 16,000

The gains were strong enough to offset the overall impact of public administration and agriculture shedding 1,000 and 9,600 positions.

Summer Employment Contributed To Strong Headline

Conditions for students filling their summer months with temporary jobs also improved. Within this category, students aged 15 to 24 had an unemployment rate of 15.1% compared to 17.5% in the year-ago period. In a similar manner, the 20-to-24 year-old cohort unemployment rate was 6.3%, the lowest since July 2028.

But Wage Growth Softens

Average hourly wages were up 2.8% from the year-ago period, marking a declaration from the 3.3% y/y June ascent.

And Canada’s Purchasing Managers Report Decline in Activity

The Ivey Purchasing Managers’ Index indicated that economic growth in Canada slowed in July with the headline slipping from 56.2 in June to 55.1. It was lowest reading since March, when it dipped below the contraction-expansion threshold of 50 to 49.7. The inventory category slipped into decline, slipping from 50.9 to 48.7 while the employment component and the prices gauge showed growth easing with results falling from 53.6 and 73.7 to 51.2 and 68.5. Supplier delivery times bucked the trend, moving from 44.3 to 50.2.

Japan Leading Indicator Unchanged From May’s Five-Year High

Japan’s Leading Indicator for June, at 116.4, was unchanged from May’s five-year high result, according to the Cabinet Office. Economists anticipated that the gauge would climb by 0.1 point. Separately, the Cabinet Office’s Coincident Index, a gauge of current conditions, climbed 0.3%, reversing from the 0.2% southward movement in May but missing the economist consensus estimate for a 0.4% improvement.