The US job creation engine went into reverse last month, sharply lowering expectations for a rate hike at the Federal Reserve’s September meeting. According to an update just published by the Bureau of Labor Statistics, 23,000 jobs were lost in July—representing a massive undershoot relative to the 80,000-consensus forecast—while the previous two months were revised down by a total 103,000 positions, bringing the three-month average pace down to 20,000, from 111,000 ahead of the release.

The unemployment rate ticked down to 4.1% from 4.2% in June, aligning with a continued drop in the participation rate. The number of jobs needed to keep unemployment stable—the so-called “break-even” rate—is believed to be around 50,000 a month, down sharply from recent years as demographic changes and immigration crackdowns reduce the number of new entrants in the labour force.

Average hourly earnings climbed 0.1% month-over-month, slowing from the 0.3% pace set in the prior month, rising 3.2% year-over-year, far below expectations for a 3.5% print.

The dollar is staging a full-scale retreat and Treasury yields are down across the front of the curve as traders anticipate less tightening from the Fed in the months ahead. Market-implied odds on a September rate cut have fallen close to the 40% mark from above 55% ahead of the release—but with several inflation updates and the August payrolls report set to land between now and the meeting, much could change over the month ahead.

Here in Canada, 75,000 new positions were added last month, jumping from 18,200 in the prior month and smashing the 17,000-job consensus forecast. The unemployment rate ticked lower to 6.4% from 6.5% previously, beating expectations for a steady print.

With Canada hosting its final FIFA World Cup game ahead of the survey week, economists had feared a drop in temporary hiring, but gains were widespread, with the vast majority of industries adding to headcount, overwhelming small losses in public administration (likely census-driven) and agriculture. More than half the total—38,600 positions—were added in full time roles. The average hourly wage for permanent employees—closely watched by monetary policymakers—fell to 3% from a year earlier, down from 3.7% in the prior month, but this was likely driven by a shift in composition.

The case for a prolonged pause from the Bank of Canada should remain intact, with growth still well below potential, trade threats hampering business investment and consumer spending, and inflation pressures largely confined to import categories driven by the Iran war. But US-Canada rate differentials are narrowing sharply as US yields back off, and the Canadian dollar is punching higher as we go to print, pointing to a decisive move through the 1.40 threshold that has repeatedly blocked its appreciation.

Taken in sum, today’s numbers reinforce our belief that the ‘US exceptionalism’ trade is on its last legs. We expect the dollar to trade more defensively in the weeks and months ahead as market participants rebalance away from an overallocation to US assets and the greenback itself.