CICC Macro Interpretation of Nonfarm: Just the Right Employment Data

Event

On July 2, 2026, the U.S. Bureau of Labor Statistics (BLS) released: Non-farm payrolls increased by 57k in June 2026, compared to expectations of 113k and a previous value of 129k; the unemployment rate came in at 4.2%, compared to expectations of 4.3% and a previous value of 4.3%. Key Views

The June non-farm payrolls data came in below expectations, mainly dragged down by a significant drop in new jobs in the leisure and hospitality sector compared to the previous month. This change may stem from the actual increase in tourists during the World Cup falling short of expectations, combined with the disruption from the event and the still-high domestic gasoline prices crowding out regular domestic tourists. The unemployment rate fell to 4.2%, primarily due to the continued decline in the labor force participation rate, rather than an expansion of labor demand. After the data release, the market's expectation of a 50bp rate hike in the second half of the year weakened significantly, but it continues to price in a 25bp rate hike in the second half. U.S. Treasury yields and the dollar index both fell. The three major U.S. stock indices were mixed, with the Nasdaq rebounding briefly before adjusting again. In detail: 1) Non-farm payrolls increased by 57k in June, well below the market expectation of 113k. The previous month's data was revised down by a total of 74k. The May non-farm payrolls figure was revised down from an initial 172k to 129k, and the April figure was revised down from 179k (initial 115k) to 148k. 2) By sector, the sharp decline in employment in the leisure and hospitality sector in June compared to the previous month was the main reason dragging the monthly non-farm data below expectations, possibly reflecting that the actual increase in tourists during the World Cup fell short of expectations, while the disruption from the event and the still-high domestic refined oil prices may have jointly crowded out regular tourists. In contrast, the education and health services and professional and business services sectors, which have been performing steadily since the beginning of the year, still provided substantial employment growth support in the month. Overall, private sector employment increased by 49k in June (previous 97k), of which goods-producing added 10k (previous 7k), and service-producing added 39k (previous 90k). In goods-producing, the main employment growth still came from construction, which added 11k (previous 6k), consistent with the trend of continued recovery in U.S. construction spending. In service-producing, employment in leisure and hospitality fell sharply to -61k (previous 40k), becoming the biggest drag on monthly job growth. Education and health services added 69k (previous 45k), professional and business services added 36k (previous 11k), with performance remaining relatively strong and highly stable since the start of the year. Financial activities added 0 (previous -22k), information added -9k (previous -4k), continuing to be weak due to the impact of AI technology changes. Government employment, total government added 8k (previous 32k), mainly because local government employment fell to 2,000 (previous 33k), failing to provide further support to overall employment. 3) Data from the household survey shows that the decline in the unemployment rate mainly stemmed from labor supply contraction rather than demand expansion. The unemployment rate fell to 4.2% in June (previous 4.3%), labor supply continued to decline, and the labor force participation rate fell to 61.5% (previous 61.8%), the lowest level since March 2021. Among them, the participation rate for prime-age workers aged 25-54 fell to 83.3% (previous 83.9%), and the participation rate for those aged 55 and above remained flat at 37.1% (previous 37.1%), both at the lowest levels since 2024. The broader U6 unemployment rate fell to 7.9% (previous 8.1%). 4) Hourly wage growth continued to rise modestly. In June, hourly wage growth increased month-on-month to 0.35% (previous 0.27%), and year-on-year to 3.52% (previous 3.39%). The average weekly hours for private sector employees were 34.3 hours (previous 34.3 hours). 5) Market reaction: After the data release, CME data showed that the market significantly weakened its expectation of a 50bp rate hike within the year, but still fully prices in a 25bp rate hike in the second half. The 2-year U.S. Treasury yield fell from 4.18% to around 4.11%, and the dollar index fell from 101.2 to 100.7. The three major U.S. stock indices all rebounded at the open, but then the Nasdaq and the S&P 500 fell again. We have mentioned many times before, in order to defend the moat of cross-border capital, the Fed will not cut interest rates temporarily after the ECB and BOJ raise rates. However, when, how, and how many times the Fed will raise rates remain a suspense. Because the Fed has blurred forward guidance, there is great divergence in the market. At the end of June, the probability of a September rate hike given by CME had already exceeded 60%. If this month's employment data further strengthens compared to May, expectations of multiple rate hikes within the year would significantly heat up. The weaker non-farm data, slightly stronger wage growth, and further declining unemployment rate perfectly illustrate the state where the U.S. job market has resilience but is not that strong. Combined with the statement at the European Central Bank forum this week that "upside risks to inflation have eased," the market has given some correction to rate hike expectations, weakening from expectations of multiple rate hikes to possibly one rate hike within the year. However, we believe that most non-AI assets are deep out-of-the-money rate cut option assets of the Fed. As long as the Fed does not cut rates again, such assets will hardly have sustained performance. On the contrary, referring to the U.S. stock market trend from 1999-2k, Fed rate hikes are not the terminator for high-prosperity assets. In other words, the end of the upward trend for AI assets is more likely to be the turning point of the AI industry's boom cycle, rather than Fed actions. It is worth noting that according to the guidance of global listed companies, Q3 may be the peak of year-over-year growth in global capital expenditure. If there is no new story for AI, there is indeed a risk of adjustment in Q4.

Source of this article: ZhaoShang Macro Zhang Jingjing Team Risk Warning and Disclaimer

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