Concerns about inflation are growing, but job growth is slowing down, raising worries about a possible recession. The U.S. jobs report for July has shifted attention to the labor market. The President of the Atlanta Fed has noted this shift and suggested a reevaluation of Fed policy. The report highlights a slowdown in job growth and wider employment challenges.

July Jobs Report Results

Nonfarm payrolls rose by just 73,000 in July, which is lower than the expected 110,000. The unemployment rate increased to 4.2%. This drop in job data raises the likelihood of a rate cut by the Fed, now estimated at 90% for September. Fed Chair Powell mentioned that two more job reports will be available before the meeting in September. There are divisions within the Federal Reserve Board about the future of policy. Two dissenting votes reflect these internal disagreements. Treasury yields have fallen, and the dollar has weakened due to expectations for easier monetary policy. Gold prices surged nearly 2%. Job growth is now focused more on healthcare, but federal employment decreased by 12,000. Long-term unemployment has risen, and the labor force participation rate has dropped to 62.2%.

Market Strategy Amid Uncertainty

There are ongoing risks from tariffs and other pressures. Revisions to labor market data show 258,000 fewer jobs for May and June, indicating sharp declines. Given the jobs report from August 1, 2025, we need to quickly change our strategy to account for a more aggressive Fed rate cut. The significant disappointment in the report and the downward revisions strongly suggest a rate cut is forthcoming in September. We can expect continued downward pressure on short-term Treasury yields, making bets on lower interest rates very appealing. Market reactions support this view, with the chance of a rate cut in September, as per the CME FedWatch Tool, now at 90%. The 2-year Treasury yield fell over 20 basis points, the biggest drop since the banking issues of 2023, indicating a major policy shift. This signals a need to adjust our positions sensitive to short-term rates. For equity derivatives, the S&P 500 breaking below its 200-hour moving average is a strong bearish indicator, overshadowing any positive news from a potential rate cut. The underlying economic weakness is now the main concern, so we should consider buying VIX call options or S&P 500 put options. These options will help protect against further declines due to recession fears in the weeks ahead. In currency and commodity markets, trends are becoming clearer. The U.S. dollar is likely to keep weakening, so we’re planning to short dollar index futures. As a result, gold has emerged as a key safe-haven asset, and its recent rise suggests that long positions in gold futures will likely remain profitable. The combination of ongoing wage growth and a struggling job market creates uncertainty, meaning volatility can work to our advantage. The public divisions within the Fed board also add unpredictability as we approach the September meeting. This situation is suitable for using options strategies like straddles on major indices, which can benefit from significant price movements in either direction. We can take lessons from the Fed’s actions in 2019, which could serve as a guide for the current market. Back then, the central bank started cutting rates amid global slowdown concerns, providing support for assets even when economic data was weak. This history suggests that while we need to be cautious about the economy, assets that thrive in a lower-rate environment could still perform well. Create your live VT Markets account and start trading now.

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