The U.S. labor market is flashing a rare warning sign after private sector payrolls fell in June for the first time in over two years, raising concerns about the economy’s health and increasing bets on Federal Reserve interest rate cuts.

Private employers cut 33,000 jobs last month, according to the ADP National Employment Report released Thursday.

That's a sharp drop from the downwardly revised 29,000 gain in May and far below economist forecasts for a 95,000 increase.

The last time this data showed a monthly contraction was in March 2023, coinciding with the collapse of Silicon Valley Bank and Signature Bank, which triggered a brief banking crisis.

The ADP report precedes the more closely watched U.S. government jobs report from the Bureau of Labor Statistics, due on Thursday. Economists expect nonfarm payrolls to slow from 139,000 in May to 110,000 in June.

Where Job Losses Hit Hardest In June

The losses were concentrated in service-providing sectors, which collectively shed 66,000 jobs. Within that group, professional and business services lost 56,000 jobs, while education and health services dropped 52,000. Financial activities cut 14,000 positions.

There were modest gains in leisure and hospitality (+32,000), trade, transportation and utilities (+14,000), and information (+5,000). Meanwhile, goods-producing industries added 32,000 jobs, driven largely by manufacturing.

"Though layoffs continue to be rare, a hesitancy to hire and a reluctance to replace departing workers led to job losses last month," said Nela Richardson, chief economist at ADP. "Still, the slowdown in hiring has yet to disrupt pay growth."

“Though layoffs continue to be rare, a hesitancy to hire and a reluctance to replace departing workers led to job losses last month. Still, the slowdown in hiring has yet to disrupt pay growth,” Richardson added.

Despite the hiring freeze, wage growth held firm. Year-over-year pay for job stayers increased 4.4%, while those who changed jobs saw an average 6.8% boost in salaries, indicating underlying labor market tightness remains.

Market Reactions: Traders Add Rate Cut Bets

Markets immediately responded to the surprise job contraction by ramping up bets on Federal Reserve rate cuts. The odds of a July rate cut increased to 25%, up from 20% the previous day.

Traders now fully price in a rate cut by September and expect another 25-basis-point reduction by December.

Despite the weak labor print, U.S. equity futures remained steady. Contracts on the S&P 500 hovered around 6,200 points in premarket trading in New York.

Gold futures – as tracked by the SPDR Gold Trust – spiked on the back of increased rate cut expectations. Bullion rose to $3,350 per ounce as investors sought safety amid labor market uncertainties.

Read Next:

US Stocks Likely To Open Higher: S&P 500 Sees ‘Average Gain Of 6.1%’ In 2nd Half, Expert Says