The rollercoaster two days were driven to a climax by non-farm payroll data.

The unexpectedly high 172,000 non-farm jobs data scared the entire market into a head-holding panic, and the swap market pushed the probability of rate hikes this year above 70%.
Will there be a rate hike?
At least in my view, the Federal Reserve will still stay on the sidelines at 3.5%–3.75% in June, and a rate hike this year is just a market-priced overhyped false proposition.
Currently, the market is clearly frightened by major news headlines, with the probability of a rate hike this year being driven up to 72.7% by sentiment, but this is only a short-term knee-jerk reaction.
A strong labor market does not mean the economy is overheating, nor does it mean inflation is hard to bring down, and it will not directly restart rate hikes.
American workers are becoming poorer; they are forced to return to low-end labor markets because they cannot sustain their livelihoods:
- Although nominal hourly wages in May increased by 3.45% year-on-year, the current actual inflation rate is only 3.8%, meaning American workers’ real purchasing power is in negative growth territory, and several quarters of inflation pressure have rapidly drained family balance sheets.
- Data shows that employment in high-paying financial activities has fallen by 22,000 people, with the main contributors to new jobs being leisure and hospitality (+70,000) and local government (+55,000). If the economy were overheating, companies would be aggressively expanding high-productivity, pro-cyclical core industries.
The facts support this: ordinary Americans, in response to soaring prices and shrinking real wages, have to lower themselves to work low-paid jobs in restaurants and hotels to make ends meet.
The increased labor supply driven by survival pressure does not have a sustainable total demand effect (because the money is quickly swallowed by inflation once received), and the Federal Reserve’s top officials are well aware of this.
On the contrary, it means that the erosion of the real economy by high interest rates has entered deep waters. If policymakers mistake this bottoming out of the economy for inflation and blindly restart rate hikes, they may quickly lead to a collapse in credit, loans, and consumer spending.
There will be no rate hikes, no rate cuts, and we are not yet at a dilemma’s bottom, but the risk markets will probably continue to endure the pressure of a high-interest-rate environment for some time.