Today's non-farm payroll data showed the US economy shedding more jobs than expected in July. Non-farm payrolls fell by 131K as the growth in private sector employment, which rose by 71K, was not enough to counter the sharp drop in government employment, with 143K of those Census workers that were let go. Forecasts had called for 60K drop.

June's data was revised lower as well, as payrolls fell by 221K, more than the 125K previously reported. June private sector jobs were revised much lower, to +31K from +83K previously.

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The jobless rate, which is calculated using a separate household survey, held steady at 9.5% in July. Economists were expecting it to edge higher to 9.6%.

The data adds another piece of evidence showing the recovery is slowing and losing momentum. The fear is that with unemployment still so high and consumer prices dropping, that the US economy could fall into a similar deflationary trap that hit Japan. That Japanese decade was marked by slow growth and falling prices. The Fed meets next week and we'll see if this data tips them into considering taking steps to support the economy.

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While private sector growth was better in July than in June, this month saw - in addition to the laying off of Census workers - a loss of 48K jobs in state and local governments, as states face significant budget strains. Manufacturing saw its number of jobs rise by 36K as motor vehicle and parts had fewer seasonal layoffs than normal in July. Construction, a sector of the economy still suffering, lost 11K in July.

In the currency markets the data hurt the US Dollar against the Euro and Yen, a theme we have seen recently as the weak US fundamentals means looser monetary policy which is being priced in against its major rivals. The Euro broke above 1.3250, while the Yen plunged below its 8-month low at 85.30.

US bond markets plunged on the news, with 2-year notes yielding a record low 0.505%, while the 10-year note is at 2.85%. Weaker yields hurts the USD/JPY as the spread between US and Japanese government debt shrinks and Japanese investors become less willing to invest in US Treasuries, weakening demand for the Dollar in the USD/JPY pair.

The US Dollar did advance against the Canadian Dollar, as Canada reported some underwhelming employment data as well, and weak investor sentiment in North America will hurt the risk appetite that would push the USD/CAD pair in favor of the Loonie.