June’s ADP jobs report threw the market a curveball with a surprising drop in private-sector employment, setting the stage for heightened anticipation around this week’s official nonfarm payrolls data.

According to figures released by ADP on July 2, U.S. private employers cut 33,000 jobs in June — the first negative reading since March 2023. That’s not only a sharp downturn from May’s revised gain of 29,000 jobs but also well short of economists’ forecasts calling for an additional 95,000 positions. The data points to a notable shift in employer sentiment, with businesses adopting a more cautious approach toward hiring.

ADP’s economists note that while widespread layoffs haven’t surfaced yet, employers are increasingly hesitant to bring on new workers. In many cases, companies aren’t filling roles left vacant by departures, contributing to the overall job decline. This hesitancy reflects growing unease about the broader economic outlook.

A closer look at sector performance shows the services industry bearing the brunt of the slowdown, particularly in professional and business services, education, and healthcare, all of which saw staffing cuts. In contrast, leisure and hospitality, as well as manufacturing, continued to add jobs—but gains in those areas were too modest to offset broader losses.

Despite the cooling in job growth, wages continue to rise. ADP reported a 4.4% year-over-year increase in average annual pay for private-sector workers in June, suggesting that labor demand, while slowing, remains relatively strong.

Often dubbed a “preview” of the official nonfarm payrolls data, the ADP report doesn’t always track closely with government figures. Still, the unexpected decline has stoked concerns about a potential softening in the labor market. Following the release, the U.S. Dollar Index (DXY) dipped below 97, a sign that markets are growing more uncertain about both the economy and the Federal Reserve’s next policy move.

As signs of a cooling job market emerge, expectations are mounting that the Fed could begin cutting rates in the second half of the year. That makes upcoming employment reports critical—not just for assessing consumer strength and inflation, but also as key indicators that could shape global market sentiment. Investors are set to closely watch the next nonfarm payrolls release for clues on where interest rates might be headed next.