The U.S. labor market demonstrated unexpected strength in June, adding 147,000 nonfarm jobs, well above forecasts of 110,000 and slightly exceeding May’s revised figure of 144,000. This robust performance—driven largely by a surge in government employment—has cast doubt on any immediate interest rate cuts, with market expectations for a July move by the Federal Reserve all but erased.

Government hiring led the pack with a 73,000-job increase, bolstered particularly by state and local sectors, which saw a 40,000-job jump in education-related roles. Healthcare and social assistance sectors continued to expand steadily, adding 39,000 and 19,000 jobs respectively. Meanwhile, the construction sector added 15,000 jobs, but manufacturing shed 7,000.

Despite these gains, the labor market sent mixed signals. The unemployment rate fell to 4.1%, defying forecasts of an uptick, but the drop was largely due to a declining labor force participation rate, which slipped to 62.3%—its lowest level since 2022. A surge of 329,000 people left the labor force, and the number of individuals not actively seeking work rose by 234,000 to 1.8 million.

The broader underemployment rate, which includes discouraged workers and involuntary part-timers, also dipped to 7.7%, its lowest mark since January. However, household survey data used to calculate the jobless rate reflected a more modest employment gain of just 93,000.

Wage growth remained moderate, with average hourly earnings increasing 0.2% in June and 3.7% over the past year, indicating contained wage-driven inflation. The average work week edged slightly down to 34.2 hours.

The upbeat job data sent markets higher and triggered a sharp rise in Treasury yields, as investors recalibrated expectations for monetary policy. Traders slashed the odds of a July rate cut from 23.8% to just 4.7%, according to CME FedWatch data. Market sentiment now points to the next possible rate reduction occurring in September, with only two cuts expected for the remainder of the year.