The U.S. July nonfarm payrolls released at the beginning of August directly reversed market expectations for the Federal Reserve’s September policy. The call for a rate hike—which was previously quite loud—has now basically disappeared. But there is still a considerable distance before a true rate cut.

The data divergence this time is especially large. July nonfarm payrolls fell by 23,000, versus the market’s forecast of an increase of 80,000 to 95,000—a huge gap. More importantly, the data for the prior two months was revised significantly downward: the total for May and June understated newly added jobs by 103,000. Over the past three months, the average monthly increase has been only 20,000, solidifying the trend that employment is cooling. As soon as the news came out, U.S. Treasury yields fell and the dollar weakened. Interest-rate-sensitive assets such as gold, growth stocks, and even cryptocurrencies like $BTC Ethereum immediately saw a sharp rebound in the short term.

However, this report contains a clear contradiction: the number of jobs has declined, yet the unemployment rate has fallen from 4.2% to 4.1%. The root cause is that the labor force participation rate has dropped to 61.4%. Many people have given up on job hunting, so they are no longer counted as unemployed. This low unemployment rate cannot prove that the job market is still hot. With monthly employment negative growth, it also can’t be used to conclude that the U.S. economy is headed for a recession.

There are two interpretations of the current market. One is that companies are cutting back on hiring and demand continues to weaken. The other is that the supply of labor is also contracting, and combined with productivity gains from automation, this results in a weak equilibrium characterized by low hiring and low layoffs. These two scenarios have very different implications for the Federal Reserve’s policy. The first would accelerate expectations for rate cuts, while the second would simply mean there’s no need to keep hiking. Disagreement within the Fed has not disappeared either. Officials focused on inflation still worry that prices could rebound.

In short, the market logic has shifted from betting on rate hikes to positioning for the Federal Reserve to pause rate hikes—but a pause does not mean rate cuts. Inflation is the key benchmark for when easing will actually take effect. If subsequent CPI remains sticky—if service and wage pressures stay high—the Fed will likely keep interest rates elevated for a long time to suppress prices. Only if future Non-Farm Payrolls continues to weaken, alongside a steady decline in inflation, will the market fully switch to a rate-cut trade.

The biggest significance of this Non-Farm Payrolls report is that it completely dispels the rationale behind aggressive rate-hike trades. As for whether asset rebounds can be sustained, whether the U.S. economy is heading into a recession, or whether it will maintain a weak equilibrium—all depends on the next two key data releases: inflation and employment.