The end of the week offered traders a perfect lesson in how unexpectedly bad news for the economy can be very good for stock markets. The latest US labor market figures provided a case in point.
On Friday, the latest nonfarm payrolls data, which track monthly changes in US employment outside the agricultural sector, showed that the economy unexpectedly lost 23,000 jobs in July 2026. Markets had expected a gain of 80,000, leaving analysts well wide of the mark.
The figures for the previous two months were also revised downward – unsurprisingly – with the US economy creating 103,000 fewer jobs in May and June than originally reported.
Although it is still too early to predict whether we are truly witnessing job losses resulting from the introduction of artificial intelligence into the workplace, the long-term outlook for the US labor market is not favorable. New jobs are being created very slowly, while companies continue to lay off workers.
Nor is that picture changed by the latest US unemployment figures, which surprisingly fell from 4.2% to 4.1%.
At first glance, this might seem like encouraging news. Upon closer examination, however, investors discovered that the decline in US unemployment was not due to people finding jobs, but rather to more than one million people dropping out of the US labor force.
The decline is therefore somewhat deceptive. No one knows exactly what has happened to the more than one million Americans who left the labor force, but they are no longer counted among the unemployed, whether because they have stopped looking for work or have otherwise dropped out of the official statistics.
Bad News for the Economy, Good News for Wall Street
All in all, despite a cosmetic drop in US unemployment, the latest figures show the number of jobs falling. The labor market is therefore under growing pressure. For the average American, that means greater job insecurity and a tougher search for new work after a layoff. For Wall Street, however, this is excellent news. Immediately after the release of these negative figures, US markets began to rise sharply and reached new record highs.
Why is that?
Because if the US job market is weakening, the Federal Reserve does not have to raise interest rates. Just a week ago, markets had priced in a 67% probability of a rate hike in September. According to the FedWatch tool, that probability is now 46%.
Kevin Warsh, appointed to head the Fed by Donald Trump – who has made no secret of his desire for lower rates – now has the opportunity to avoid raising rates without attracting attention, thanks to the situation in the US labor market.
The Iran Deal Is Slipping Further Out of Reach
For the markets, it was a timely reprieve. Throughout the week, they had been rising primarily on the prospect of a new agreement between Iran and the US. It was supposed to be signed last Wednesday. But that did not happen. Shortly thereafter, Iranian demands regarding the operation of the Strait of Hormuz were leaked to the media; these included a ban on Israeli and US ships and the imposition of a fee on virtually everyone except Iran’s allies.
In other words, clear evidence of an Iranian victory.
The US administration denied that it was planning to sign anything of the sort. Negotiations over a new agreement have therefore once again reached a standstill. The market could react negatively to this. An agreement between Iran and the US was supposed to bring about a drop in oil prices. This would also reduce inflation in the long run and, given that markets and central bankers look primarily to the future, interest rates might not need to rise. Now, however, there is hope that rates will not be raised regardless of how negotiations between Iran and the US unfold.
Although oil prices initially fell on the possibility of an agreement and then rose slightly as hopes faded, they do not fully reflect the reality at sea. Last week, very few ships passed through the key straits. From Monday through Thursday, only 33 ships passed through the Strait of Hormuz. Before the war, normal traffic averaged around 130 to 140 vessels per day.
Developments in the Bab el-Mandeb Strait off the coast of Yemen were even more interesting. On Monday and Tuesday, 20 ships passed through each day. On Wednesday, traffic practically came to a halt after Houthi rebels claimed to have attacked a Saudi tanker. Only one ship passed through the strait. Although traffic resumed on Thursday and the number of transits jumped to 26 ships, Wednesday demonstrated just how fragile the current situation is. Neither oil nor liquefied natural gas is being transported through these vital shipping lanes anywhere near the levels we were accustomed to – or the levels the global economy needs.
Gold Is Betting on a More Dovish Fed
In light of developments in the Middle East, it is welcome news for the markets that a new factor has emerged that may prevent interest rates from rising. The odds of the Fed holding rates steady have now shifted significantly.
The shift is a positive signal for Bitcoin, but even more so for gold. Since reaching its peak in late January, when it surpassed $5,400 per troy ounce, the price of gold has been in a strong bearish trend.
This bearish trend has persisted despite the outbreak of conflict between Iran and the US. The safe-haven premium has been virtually wiped out because of concerns about restrictive monetary policy and rising yields on long-term US bonds. These bonds are a direct competitor to gold, as both investments are considered safe havens.
One of the main attractions of long-term US Treasuries is their annual yield, which exceeds 5% for 30-year bonds. Investors receive no yield for holding gold, helping explain the precious metal’s difficult six months.
Last week, gold rose sharply enough to break its long-term downward trend – at least on the chart. The move suggests that a large portion of investors do not expect the Fed to pursue a tight monetary policy and are instead betting on further weakness in the US dollar.