Event: At 20:30 on June 7th Beijing time, the US released its non-farm employment data for May.
Key points: The US added significantly more non-farm jobs and wages in May, but the unexpected increase of the unemployment rate to 4.0%--the highest level in nearly two years--is due to a large number of illegal immigrants taking jobs from US residents. The difference in statistical methods between the two determines that the number of non-farm jobs can better reflect the real employment situation than the unemployment rate. The US labor market is still strong, which will support the economy and maintain resilient inflation. The uncertainty of the Fed's interest rate cut path remains high, and the next three months will be an important observation window.
1. In May, the US added 272,000 new non-farm jobs, higher than the expected 185,000. The unemployment rate was 4.0%, higher than the expected and previous 3.9%, the highest in the past 30 months. The labor participation rate was 62.5%, lower than the expected and previous 62.7%, the lowest in the past 16 months. The average hourly wage in May rose by 0.4% from the previous month, higher than the expected 0.3%, the previous 0.2%, and the average of the previous 12 months. Despite the fact that low-end service industries contributed the most to the added jobs, wages remain at a high growth rate, indicating strong performance. 2. After the non-farm data was released, the interest rate futures implied that the expected interest rate cut significantly cooled down. Currently, the probability of a rate cut in June remains at 0%, the probability for July fell from 20% to below 10%, the probability for September fell from 80% to 50%, and the probability of two rate cuts this year dropped from nearly 100% to around 50%. 3. As we pointed out in previous reports, since 2020, a large number of illegal immigrants have entered the US and have taken away job opportunities from US residents, due to the relaxed border control policy. Since the statistical method for non-farm employment counts enterprises, this part of illegal immigrants can be included in the statistics; but it is difficult to incorporate illegal immigrants into the sample for the unemployment rate, which counts households. Therefore, the number of non-farm jobs is a better indicator of the true employment situation than the unemployment rate. 4. We believe that the Fed's interest rate cut is still the most probable outcome this year, but the pace of this round of rate cuts will not be too fast. Considering that there are still three months of data available for observation before the Fed meeting in September, if employment and inflation data continue to weaken in the subsequent three months, the Fed may cut interest rates twice in September and December; conversely, if the data remains strong, the Fed may only cut interest rates once in November or December. Therefore, there is still a high degree of uncertainty in the Fed's interest rate cut path, and the next three months will be an important observation window.
After the release of the non-farm data, the US dollar index rose sharply, and gold plummeted, with the expected interest rate cut significantly cooling down.
Large asset class performance: After non-farm data was released, US stocks fell sharply, with the S&P 500, Nasdaq, and Dow Jones Industrial Average down 0.1%, 0.2%, and 0.2%, respectively. The 10-year US Treasury yield surged, ending up 14.4bp higher than the previous day at 4.44%. The US dollar index rose rapidly, ending up 0.8% at 104.9. Spot gold continued to fall, ending down 3.5% at $2293.5 per ounce.
Change in expected interest rate cuts: After the non-farm data was released, the implied probability of an interest rate cut in the futures market significantly cooled down. Currently, the probability of a rate cut in June remains at 0%, the probability for July fell from 20% to below 10%, the probability for September fell from 80% to 50%, and the probability of two rate cuts this year dropped from nearly 100% to around 50%.
The main text is as follows:
1. The US added significantly more non-farm jobs and wages in May, but unemployment rate unexpectedly rose to the highest point in two years.
Overall employment performance: In May, the US added 272,000 new non-farm jobs, higher than the expected 185,000. The added non-farm jobs in April and March were revised downwards from 175,000 and 315,000 to 165,000 and 310,000, respectively, resulting in a total downward revision of 15,000 over the two months. The unemployment rate was 4.0%, higher than the expected and previous 3.9%, the highest in the past 30 months. The labor participation rate was 62.5%, lower than the expected and previous 62.7%, the lowest in the past 16 months.
Industry employment performance: Overall non-farm employment in the US increased by 0.17% month-on-month in May. Among the major industries, those that improved the most in month-on-month employment were the education and health services industry at 0.33%, the construction industry at 0.26%, and the leisure and hospitality industry at 0.25%; those that performed poorly were the mining industry at -0.63%, the information industry at 0%, the wholesale industry at 0.05%, the manufacturing industry at 0.06%, and the retail industry at 0.08%. Other industries had similar overall employment performance. Overall, the current US employment situation still features significant improvement in low-end service industries and poor performance in retail and high-end industries.
Salary data performance: In May, the average hourly wage in the US rose by 0.4% on a monthly basis, higher than the expected 0.3%, the previous 0.2%, and the average of the previous 12 months; the average weekly wage rose by 0.4% on a monthly basis, higher than the previous -0.1% and the average of the previous 12 months. Combined with industry employment performance, wages remain at a high growth rate, indicating strong performance.
Non-farm data release led to a surge in the US dollar index and a sharp drop in gold, with the expected interest rate cut significantly cooling down.
Large asset class performance: After non-farm data was released, US stocks fell sharply, with the S&P 500, Nasdaq, and Dow Jones Industrial Average down 0.1%, 0.2%, and 0.2%, respectively. The 10-year US Treasury yield surged, ending up 14.4bp higher than the previous day at 4.44%. The US dollar index rose rapidly, ending up 0.8% at 104.9. Spot gold continued to fall, ending down 3.5% at $2293.5 per ounce.
Expected interest rate change: After the non-farm data was released, the implied probability of an interest rate cut in the futures market significantly cooled down. Currently, the probability of a rate cut in June remains at 0%, the probability for July fell from 20% to below 10%, the probability for September fell from 80% to 50%, and the probability of two rate cuts this year dropped from nearly 100% to around 50%.
Continue to remind: Non-farm employment is a better indicator than the unemployment rate, and the Fed's interest rate cut path is still highly uncertain.
Signal of deviation in US employment data: As we pointed out in previous reports, since 2020, due to the relaxation of border controls in the United States, a large number of illegal immigrants have entered and occupied employment opportunities of US residents. Since the statistical caliber for the increase in non-farm employment is enterprises, this part of illegal immigrants can be included in the statistics; and the statistical caliber for the unemployment rate is households, making it difficult to include illegal immigrants in the samples. Therefore, the number of non-farm employment is more reflective of the real employment situation than the unemployment rate.
In addition, other employment indicators also point to the fact that the employment situation in May continues to be good in the United States. For example, the employment indexes of the May ISM manufacturing and non-manufacturing PMIs have both increased; the number of initial claims for weekly unemployment benefits and the unemployment rate of those who hold unemployment insurance remain low; although there has been a slight decline in job vacancies in April, the absolute level is still higher than before 2020. We maintain our previous judgment: the US labor market is still strong, which will continue to support the resilience of the US economy and inflation.
Outlook for the Fed's policy: At present, the progress of US inflation is still slow, and strong employment and wage growth will further exacerbate inflation pressure, which will also force the Fed to be more cautious in its interest rate decision. Looking ahead, we believe that it is still highly probable for the Fed to initiate interest rate cuts this year, but the pace of this round of interest rate cuts will not be too fast. Taking into account that there are still three months of data available for observation before the Fed's September interest rate meeting, if the employment and inflation data weaken continuously for these three months, the Fed may cut interest rates in September and December respectively. On the other hand, if the data for these three months remain strong, there may only be one interest rate cut in November or December. Therefore, there is still considerable uncertainty in the Fed's interest rate cutting path, and the next three months will be an important observation window.
Risk warning: US economy and inflation, Fed monetary policy, geopolitical conflicts, etc. may continue to exceed expectations.
Editor/Emily