Holiday Calm, Data Storm: June Economic Reports Delay Fed Cut Hopes

While Wall Street was running on half-steam ahead of the July 4 holiday, a firehose of U.S. economic data poured in Thursday morning—largely unnoticed by traders already heading for the Hamptons. Those who missed it may regret it: the data painted a picture of a still-resilient economy, complicating expectations for a Federal Reserve rate cut this summer. Solid job growth, rising factory orders, stronger ISM services activity, and better-than-expected initial claims combined to push rate-cut bets out toward the back half of 2025.

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June's nonfarm payroll report showed 147,000 jobs added, topping consensus estimates of 110,000. That said, the quality of the beat is up for debate. Nearly half the gains—73,000 jobs—came from government hiring, mostly in state and local education. Private sector job creation was soft, posting just 74,000 jobs (versus 105,000 expected), marking the weakest print since October 2024. Factory jobs fell 7,000, slightly worse than expected, with ongoing contraction in durable goods manufacturing—a warning sign for the industrial economy.

Wage data was steady but underwhelming: average hourly earnings rose 0.2% month-over-month, below the expected 0.3%, and 3.7% year-over-year (vs. 3.9% consensus). The average workweek slipped to 34.2 hours from 34.3. Unemployment edged up to 4.1%, continuing a flat trend but above the 4.0% median forecast. Nonetheless, prior month revisions were modestly positive, with April and May gains revised up by a combined +16,000 jobs.

Markets digested the headline beat with cautious optimism. Equities posted modest gains, helped by a drop in weekly jobless claims (233,000 vs. 240,000 consensus) and a stronger-than-expected ISM Services report. The Services PMI bounced back into expansion territory at 50.8 (vs. 50.5 expected), up from 49.9 in May. Business activity and new orders surged, although the employment subindex slid deeper into contraction at 47.2. Prices paid remained elevated at 67.5, suggesting inflation stickiness remains a concern in service sectors.

Factory orders provided further upside surprise. May’s data showed an 8.2% surge, matching consensus, and driven by a sharp rise in transportation and defense equipment. Orders excluding transportation rose 0.2%, while nondefense capital goods orders excluding aircraft were unchanged at +1.7%. Shipments of core capital goods were revised slightly down to +0.4%. Overall, this data hints at durable investment demand holding up—particularly in high-tech and aerospace.

The U.S. trade deficit widened more than expected in May to $71.5 billion (vs. $71.0B consensus), driven by a 4% drop in exports amid weaker global demand. Imports dipped just 0.1%. The goods deficit rose to $97.5B, though the services surplus held firm at $26.0B. Notably, the U.S.-China trade deficit narrowed to $13.9B from $17.2B—likely to fuel more chatter in Washington as the “One Big Beautiful” trade bill barrels toward a weekend vote.

Collectively, this flurry of releases highlighted a few major themes. First, the U.S. consumer and services economy remain afloat, if not robust. Second, inflation pressures are easing incrementally but remain sticky in pockets. Third, the labor market is cooling slowly but not cracking. Finally, the underlying resilience means the Fed has little urgency to cut rates in July or September.

Rate futures responded accordingly. Markets now price just a 75–80% chance of a September rate cut, down sharply from 92% earlier this week. Treasury yields jumped on the jobs data: the 2-year yield climbed 12 bps to 3.90%, while the 10-year rose 6.7 bps to 4.36%. The dollar index surged in response, while gold slipped—another sign that the “Goldilocks” narrative is wearing thin as higher-for-longer rates regain credibility.

In short, the data came in “better than feared” but not good enough to reignite risk appetite. It was a classic Fed puzzle: inflation isn’t too hot, growth isn’t too cold, and the labor market isn’t broken—just soft around the edges. For investors, that likely translates to a summer stuck in limbo, waiting for inflation to soften more decisively or earnings season to deliver clarity.

The takeaway? The economy isn’t rolling over. But the longer it grinds sideways with modest growth and sticky inflation, the harder it will be for the Fed to justify a dovish pivot. With sentiment leaning bullish and positioning increasingly risk-on, Thursday’s data may serve as a subtle warning: rate cut hopes just got kicked down the road—and the path forward may be choppier than expected.