Job growth in June exceeded expectations, bolstered by government hiring, as the labor market demonstrated unexpected strength, likely eliminating the potential for a July interest rate cut.

Nonfarm payrolls rose by a seasonally adjusted 147,000 for the month, surpassing the estimate of 110,000 and slightly higher than the upwardly revised 144,000 in May, according to the Bureau of Labor Statistics' report on Thursday. April's figure also received a minor upward revision, now at 158,000 following an increase of 11,000.

The unemployment rate decreased to 4.1%, the lowest since February, contrary to expectations of a slight rise to 4.3%. A broader measure that includes discouraged workers and those working part-time for economic reasons edged down to 7.7%, the lowest since January.

Although the unemployment rates decreased, this was largely due to a reduction in the number of people working or actively seeking employment.

The labor force participation rate fell to 62.3%, its lowest level since late 2022, due to a 329,000 increase in those not counted in the labor force. The household survey, which calculates the unemployment rate, reported a smaller employment gain of just 93,000. The number of individuals who had not searched for a job in the past four weeks increased by 234,000 to 1.8 million.

Stocks climbed following the report, while Treasury yields surged during a trading session that will end early ahead of the U.S. Independence Day holiday on Friday.

The July increase was nearly in line with the year-to-date average of 146,000.

“The strong June jobs report indicates that the labor market remains robust and effectively rules out a July rate cut,” said Jeff Schulze, head of economic and market strategy at ClearBridge Investments. “Today’s positive news should be seen as such by the markets, with equities rising despite the concurrent increase in interest rates.”

In addition to the solid payroll increases and decline in the unemployment rate, average hourly earnings grew by 0.2% for the month and 3.7% from the previous year, suggesting minimal upward pressure on wage-related inflation. The average work week slightly decreased to 34.2 hours.

Government employment saw a significant rise, leading all categories with a 73,000 increase due to robust state and local hiring, especially in education-related roles, which increased by 40,000. The federal government, still experiencing the effects of cuts from Elon Musk’s so-called Department of Government Efficiency, lost 7,000 positions.

Moreover, the health care sector continued to be strong, adding approximately 39,000 jobs, while social assistance contributed around 19,000.

Construction experienced an increase of 15,000 jobs, whereas manufacturing lost 7,000. Most other sectors showed little change.

“The US job market continues to largely stand tall and sturdy, even as headwinds mount — but it may be a tent increasingly held up by fewer poles,” wrote Cory Stahle, economist at Indeed Hiring Lab. “The headline job gains and surprising dip in unemployment are undoubtedly good news, but for job seekers outside of healthcare & social assistance, local government, and public education, the gains will likely ring hollow.”

The payrolls report comes with an intensified focus on where the Fed heads with monetary policy as signs increasingly appear of a slowing labor market while President Donald Trump’s tariffs thus far have produced a muted impact on inflation.

In related news, the Labor Department also reported Thursday that initial unemployment claims for the week ending June 28 fell to 233,000, a decline of 4,000 and below the estimate for 240,000.

Trump has demanded the Fed lower its benchmark interest rate, which it has kept steady in a range between 4.25% and 4.5% since December. Along with that, the president on Wednesday upped the stakes, saying in a Truth Social post that Fed Chair Jerome Powell “should resign immediately.”

For his part, Powell has kept a cautious tone on policy. In an appearance Tuesday, the central bank leader said that while every meeting is on the table for a rate cut, the strength of the U.S. economy is affording time to evaluate the incoming data.

Market pricing shifted strongly following the payrolls report, with traders all but taking the chance of a July rate cut off the table. Odds for a July move fell to 4.7%, down from 23.8% on Wednesday, according to the CME Group’s FedWatch. The market continues to see the next reduction not coming until September and also reversed expectations for three total cuts this year, with the likelihood now reduced to two.

There had been some speculation ahead of the report that a weak number was possible, with private payrolls service ADP on Wednesday reporting a loss of 33,000. However, the BLS report showed a gain of 74,000 in that category.

Those getting jobs tilted strongly to full-time positions, which increased by 437,000. Part-time workers fell by 367,000.