Guest Commentary by Mike Castle
Senior Commodities Economist
August 7 – The U.S. economy unexpectedly lost 23k jobs in July, dramatically below market expectations of an 80k increase and marking the worst Non-Farm Payrolls print since February. Furthermore, May and June were both revised sharply downward, with combined revisions showing 103k fewer jobs than previously reported. Outside of the healthcare sector, which added 22k jobs in July, the losses were very broad-based. Government payrolls saw the largest decline, shedding 53k jobs in July, the largest seen since October 2025, while June was revised down to show a loss of 10k jobs as well. The private sector at least saw growth, adding 30k jobs in July, now matching the month prior after it was revised down from the 49k initially reported, and substantially missing forecasts of 78k jobs being added. This is a sharp reversal in course from the largely better than expected U.S. labor data seen earlier this week.
Despite the ugly jobs figures, the headline unemployment rate fell to 4.1% in July, below forecasts of holding steady at the 4.2% seen in June. While that may seem promising, this is largely a function of a continued decline in people participating in the labor force rather than actual job growth. The labor force participation rate slipped to 61.4% in July, now the lowest level since February 2021. Excluding the pandemic and its subsequent recovery, this would be the lowest labor force participation rate seen since 1976.
Stock futures surged following the release, pointing to a positive open as the surprisingly weak labor data points to a less hawkish Fed, especially on the front-end. An immediate drop in 2-year treasury yields acts as evidence of this, falling to the mid 4.16% range, with 10-year yields falling as low as 4.60% but now hanging around 4.62%, and 30-year yields dropping below 5.18% briefly but now holding just above 5.19%. The VIX remains muted, touching a fresh pre-war low around the 14.8 level but rising back to hover above 15.3 at the time of writing. The dollar has expectedly fallen hard in response as well, briefly touching a low not seen since mid-June and now sitting around 99.5. Crude oil is quietly lower to start the day, with nearby WTI down 1.8% to trade near $76.80 and nearby Brent down 0.8% to trade near $81.85 at the time of writing. Meanwhile, the ags are mostly in the green to start the day.
The initial sentiment on Wall Street following this morning’s release appears to be that this may show enough weakness to restrain the Fed but not necessarily trigger immediate recession/growth concerns. The next major test will be next week’s inflation data, with July CPI due out on Tuesday (8/11) and PPI due out on Wednesday (8/12). Obviously, June brought a welcomed reprieve, but the rebound in energy prices seen in July are expected to result in a resumption of inflationary pressures. Yesterday’s unit labor cost data did provide some optimism of less underlying inflationary pressures, but ultimately, we’ll need to see the data for confirmation. A resumed heating up of inflation would complicate the picture notably for the Fed, as the dual mandate would again be facing pressures in opposite directions.
The Houthis yesterday notably escalated their attacks on both Saudi Arabia itself and Saudi-backed Yemeni government forces, reportedly injuring 11 civilians in the Saudi city of Najran, near the border between the two countries, while also carrying out their deadliest attack on Yemeni government forces since the 2022 truce. Given the recency and fog of war, reported death tolls are uncertain, with the Houthis claiming they had inflicted “hundreds” of casualties, though media reporting varies from 30 – 58 killed as of the time of writing. Regardless of the confirmed figures, the point is this is a notable escalation in violence in a theater that had finally seen a relative sense of calm compared to the prior years of conflict, and one that appears to be aimed at drawing the Saudis in more directly. Saudi Arabia is already being forced to defend itself against Iran, and Iran-backed proxies in Iraq, so reopening the Yemeni front can impose disproportionate costs and strategic dilemmas. The Saudi government warned that they expect imminent attacks from both the north and the south, noting their intelligence observing drones and missiles being moved into position in both areas, all under the supervision of the IRGC. At the same time, the Houthis have continued their attacks on Saudi vessels in the Red Sea, maintaining the risks to the movement of commodities from the region.
Saudi Arabia, Pakistan, and Turkey signed a joint defense agreement today, symbolically taking place in Mecca, Saudi Arabia. A joint statement from Pakistan/Turkey noted: “The agreement is intended to strengthen collective deterrence against any act of aggression and stipulates that any armed attack against any one of the three states shall be regarded as an attack against them all.” This pact raises the potential cost, whether for the Houthis or Iraqi militias, of attacking Saudi Arabia as they now run the risk of bringing in additional, powerful parties. While the language is very explicit about the pact being specifically defensive, not offensive, in nature, it does create a formal mechanism by which a Houthi or Iraqi-militia attack could become a multi-state conflict. Ultimately, the market’s main fear when this conflict began five months ago was seeing it spread into a broader regional conflict, and we’re continuing to see that risk play out.
The timing and urgency of this pact may indicate Saudi concern that an agreement between the U.S. and Iran may not mean an immediate elimination of attacks on Saudi Arabia, with Iranian-aligned proxies in both Iraq and Yemen effectively filling the place of direct Iranian strikes. Momentum appears to be moving toward some form of near-term de-escalation between the U.S. and Iran this week, though a great deal of uncertainty remains. Reports have circulated this week of a joint Iran/Oman agreement to formally reopen the Strait of Hormuz being close Market closures have been a featured time for notable development in the conflict thus far, likely putting traders on edge heading into the weekend. We’ve seen the U.S. hold off on escalations over the last two weekends, allowing crude oil prices to fall sharply into the following week. What happens next is anyone’s guess, with the U.S. seemingly looking to de-escalate but the IRGC looking to drag this conflict out as long as possible in order to cause political damage ahead of the midterm elections this fall.
