Non-Farm Payrolls Slowdown Prompts Reversal in Rate Cut Bets

Following the release of the Non-Farm Payrolls Report, interest rate futures traders significantly altered their positions, abandoning their bets on a July Federal Reserve rate cut. This shift in sentiment came after the report indicated a slowdown in employment growth and a slight increase in the unemployment rate, which had been anticipated by economists. The unexpected negative value in the "small non-farm" data earlier had heightened market vigilance, leading traders to reassess their expectations for the Federal Reserve's monetary policy.

The report showed that the U.S. employment growth rate slowed, with an increase of 0.11 million people, down from 0.139 million in May. The unemployment rate rose from 4.2% to 4.3%, reaching its highest level since October 2021. This data suggested that multiple pressures, including trade friction, artificial intelligence replacing jobs, and tightened immigration policies, were impacting the job market. The uncertainty caused by trade tariffs and the resulting cautious approach by companies in hiring and expansion further contributed to the slowdown.

Economists had generally expected the U.S. employment growth rate to slow, with an increase of 0.11 million people, down from 0.139 million in May. The unemployment rate was also expected to rise from 4.2% to 4.3%, reaching its highest level since October 2021. The market also expected that this summer the unemployment rate and inflation would continue to rise due to cost increases triggered by tariffs and disruptions in business activities.

The ADP employment change, known as the "little non-farm," unexpectedly recorded -0.033 million in June, far below the expected 0.095 million, with a previous value of 0.037 million. This was the first decline in employment since March 2023, indicating a weak job market. Subsequently, traders increased their bets on at least two interest rate cuts by the Federal Reserve before the end of 2025, raising the probability of a rate cut in July from about 20% before the data was released to 27.4%.

The ADP Chief Economist pointed out that employers' reluctance to hire and the negative filling of positions left by departing employees were the main reasons for the contraction in employment. The uncertainty of trade tariffs was seen as the primary cause of the slowdown in the job market, causing companies to be cautious in hiring and expansion in the face of long-term policy risks.

Pantheon Macroeconomics, through the analysis of data from the private payroll platform Homebase, judged that the momentum of new non-farm jobs had shown signs of fatigue, predicting that the actual increase in June would be only 0.1 million, below market consensus. Currently, the U.S. job market faced multiple pressures, including trade friction causing a halt in hiring, the intensification of effects caused by artificial intelligence replacing jobs, and tightened immigration policies reducing labor supply.

In the past three months, the U.S. had added an average of 0.135 million non-farm jobs per month, far below the 0.186 million of the same period last year. The tariff measures of the Trump administration had triggered global trade tensions, making companies more cautious about future sales and economic prospects. Yet even so, the job growth rate was still sufficient to keep the unemployment rate at a low level. The unemployment rate had risen from a 50-year low of 3.4% to 4.2%, and while it had increased, it remained generally low. Wall Street widely expected that with an increase in labor supply during graduation season, the unemployment rate in June may further rise to 4.3%.

The tightening of immigration policies had also significantly reduced the demand for new jobs each month, even estimating levels below 0.05 million. A reduction in immigration may limit the job growth but could also exert downward pressure on the unemployment rate due to a decrease in the number of job seekers, leading to contradictions in future employment reports.

In terms of wages, job vacancies were no longer significantly exceeding the number of job seekers, reducing the pressure on companies to attract talent, and the wage growth rate had fallen from nearly 6% in 2022 to 3.9%. The Federal Reserve believed that a 3% annual increase in wages would not trigger new inflationary pressures. Currently, immigration restrictions had not yet provided upward momentum for wage levels, and companies' bargaining power had increased.

Data released this Tuesday showed that the number of job openings in the U.S. unexpectedly rose to about 7.77 million in May, the highest since November of last year, primarily driven by strong demand in the leisure and hospitality industry, which accounted for three-quarters of the new vacancies. Meanwhile, the number of layoffs decreased by 0.188 million, with the layoff rate falling to 1%, but hiring activity had slowed in the healthcare and manufacturing industries. Despite the overall hiring showing signs of fatigue, the labor market remained relatively stable, with the vacancy-to-unemployed ratio rising to 1.1, and the quit rate slightly increasing, reflecting employees' continued confidence in the market. Economists warned that if consumer spending continued to weaken, future demand for new employees may be further stifled.

Weak non-farm payrolls would lead the Federal Reserve to cut interest rates sooner, putting pressure on the US dollar. If the market confirmed a significant deterioration in the labor market, investors would more firmly bet on the Federal Reserve turning to a dovish stance, bringing greater downward pressure on the US dollar. Recent geopolitical tensions had eased, reducing the safe-haven appeal of the US dollar. The urgency of domestic fiscal risks in the US, such as Section 899 and retaliatory tariffs, had decreased, further lowering the uncertainty impact of fiscal policy on the market.

The current benchmark interest rate in the US was maintained in the range of 4.25% to 4.50%; if employment data was weak, it would increase the likelihood of a rate cut at the July meeting. Federal Reserve Chairman Powell stated at the central bank meeting in Portugal that he would "wait and see" the impact of tariffs on inflation before deciding on the timing of interest rate cuts. The possibility of a rate cut during the July 29 to 30 meeting had not been excluded, prompting a slight rise in market expectations for that rate cut. He noted that most Federal Reserve officials expected that rates would be lowered later this year, but the final decision still depended on data performance. He previously emphasized that unexpected weakness in employment would also trigger earlier rate cuts.