June US Nonfarm Payrolls: Another "Correction" of the Rate Hike Narrative

June’s nonfarm payrolls poured cold water on the strong recovery of this year’s job market, prompting the market to reassess the Fed’s monetary policy path. As we mentioned in our interim report, “Non-Equilibrium Recovery Amid a Deepening K-Shape,” against the backdrop of a “K-shaped divergence” and economic imbalance in the U.S., subsequent employment and inflation data are unlikely to repeatedly hit new highs. The June nonfarm payrolls, which significantly missed expectations (only +57k), a further downward revision of prior months, and wage growth lagging behind inflation, further validate our earlier judgment. At least for now, we believe the recovery of the U.S. job market still faces challenges and is far from overheating.

Capital markets have also begun to “correct” the previously aggressive path of rate hikes. A single month of payroll data, of course, cannot fully reverse tightening expectations, but it at least takes the first step in challenging the rate-hike narrative. After the data release, the market quickly pulled back its aggressive pricing of rate hikes, excluded the possibility of a September hike, and shifted the overall window for year-end rate hike bets to after October. In terms of asset performance, precious metals like gold and silver rose across the board, but tech stocks underperformed due to doubts about computing power shortages. U.S. bond yields fell in tandem, and the dollar index dropped below 101, hitting its lowest level since last Monday.

We believe the decline in June employment data carries several important signals:

First, the reversal in the direction of revisions is a more important signal than the +57k itself. The upward revision of 93k in total for March and April broke the pattern of consecutive months of downward revisions, leading the market to reassess the magnitude of job expansion. But just one month later, the momentum of downward revisions “returned”: April and May nonfarm payrolls were cumulatively revised down by 74k. The prior month’s evidence supporting “employment resilience is not a castle in the air” now faces new verification after this month’s data release.

Second, the breadth of the job recovery remains questionable, especially the sharp decline in leisure and hospitality, confirming the one-off nature of the “peak season + World Cup” impulse in May. Employment in leisure and hospitality plummeted by 61k in June, a symmetric reversal from the jump of 70k in the previous month. The pull from the World Cup effect and summer tourism may have been a front-loaded hiring overhang, not the start of demand expansion.

Excluding the noise from leisure and hospitality, the real engine of job growth has re-converged to a familiar contribution list: Professional and business services (+36k), social assistance (+25k), and healthcare (+22k). The breadth of job expansion remains narrow. Meanwhile, the gain in healthcare is already significantly below the average monthly level of 38k over the past 12 months, as the “evergreen tree of nonfarm payrolls” continues to slowly lose steam.

Finally, the “false heating” in the unemployment rate and wage growth also significantly diminishes the quality of this employment report. The unemployment rate dropping to 4.2% seems to provide some offset to the weak nonfarm data, but the labor force participation rate also slipped 0.3 percentage points to 61.5%. The improvement in the unemployment rate was almost entirely driven by a contraction in the denominator.

At the same time, the share of long-term unemployed rose to 27.3%, an increase of 286k year-over-year. While initial jobless claims remain at relatively low levels in four years, continuing claims have edged up, and the time needed to find a job is lengthening. The frozen pattern of “low hiring, low layoffs” has not thawed but continues to deepen.

Wage growth exhibits a similar pattern: although the average hourly earnings rose by 0.1 percentage point year-over-year to 3.5%, that is far below the pace of inflation, meaning real wages remain in negative growth.

Looking ahead, although the market’s rate hike expectations have been pushed back, for the Fed, this report did not open any “door” but instead welded both “doors” tighter. June’s inflation data will be a further test of the short-term economic situation after the reopening of the Strait of Hormuz. If CPI gradually slows in June, it could help further correct rate hike expectations, and the real constraints on Fed policy may narrow significantly. However, if inflation remains elevated, a stagflation-like combination of “high prices and low employment” may intensify market fears about rate hikes and recession.

Therefore, the Fed needs more time to observe, especially for Warsh, before his reform group achieves interim results (in the fall), the Fed is unlikely to make a substantive interest rate decision change. Maintaining the status quo may still be the best choice for now.

Source: Chuanyue Global Macro

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