GF SECURITIES: May non-farm payroll data supports the Federal Reserve's wait-and-see stance

According to the Zhitong Finance APP, GF Securities released a research report stating that the employment data for May continues to show certain resilience, and the Federal Reserve's "wait-and-see" stance and cautious approach to interest rate cuts are supported by the data. Fed Watch data indicates that the Federal Reserve is highly unlikely to cut interest rates in June and July, with a 51.8% probability of a rate cut in September, down from the previous 54.3%, showing limited change.

The following is a summary of the research report:

First, according to data released by the U.S. Department of Labor on June 6, the non-farm payrolls increased by 139,000 in May, higher than the expected 126,000. The unemployment rate remained at 4.2%, in line with expectations. The data for the previous two months was revised down by a total of 95,000, but even after the revision, the 147,000 new non-farm jobs in April still slightly exceeded the market expectation of 138,000 at that time. In simple terms, the U.S. labor market continues to show resilience in the short term.

Second, when breaking down the structure, healthcare (+78,000) and leisure and hospitality (+48,000) accounted for 90% of the total increase, reflecting that the support for the U.S. labor market comes from service consumption. Manufacturing, retail trade, and government employment were all drag factors in May. The number of federal government jobs turned negative in May, and the impact of DOGE layoffs may be starting to gradually show. It is worth noting that the trade and transportation sector added 4,000 jobs, possibly corresponding to some industries accelerating inventory replenishment during a calm trade period.

Third, the unemployment rate changed little, with the May unemployment rate (U3) slightly rising from the previous 4.19% to 4.24%, while the most critical permanent unemployment ratio remained unchanged. The number of initial unemployment claims continued to rise this week, but the seasonally adjusted data is not significantly different from previous years. Hourly wages increased by 3.9% year-on-year, compared to an expected increase of 3.7%, and a month-on-month increase of 0.4%, against an expected increase of 0.3%. Another more representative measure, the Index of Aggregate Payrolls Private, showed a 5% year-on-year increase in May, lower than the previous 5.3% but still higher than the average year-on-year increase of 4.8% in 24 months. The stickiness of wages indicates that consumption is unlikely to slow down in the short term.

Fourth, however, there are still some aspects of the labor market showing signs of slowdown. First, the employment diffusion index (which reflects the breadth of employment) decreased, with the overall diffusion index falling from 56 to 54.2, and the manufacturing employment diffusion index dropping to 41.7, the lowest level since August 2024; second, the proportion of full-time employment fell to 49.3% (previously 49.6%), and the total employment population ratio dropped to 59.7%, the lowest since the pandemic. Third, in the household survey, the number of people transitioning from employment to non-labor force increased to 5.41 million, up from 4.44 million, marking the highest monthly increase, possibly due to federal administrative leave, delayed departures, and tightened immigration policies. This is also one of the backgrounds for the decline in labor participation rate, which was 62.4% in May, compared to an expectation of 62.6% and a previous value of 62.6%.

Fifth, another phenomenon is that the labor participation rate of the foreign-born population has significantly declined, from 66.5% to 65.9%, possibly related to the U.S. government's termination of Temporary Protection Status (TPS) for Venezuelan nationals. On May 19, 2025, the U.S. Supreme Court approved the government's termination of TPS for Venezuelans, directly affecting approximately 348,000 holders; According to FWD.us, the TPS labor force participation rate is approximately 77%, which means about 270,000 on-duty employees will lose their work permits and be removed from the payroll after a grace period of 60-180 days. If the exit process is evenly distributed over the following year, approximately 20,000 positions may be reduced each month. In simple terms, the tightening of immigration is also beginning to show its suppression of labor supply. We understand that this is not a good thing for the mid-term U.S. economy; fiscal expansion, capital expenditures by technology companies, low-cost imports, and increased immigration are the four main drivers of nominal growth in the U.S. from 2021 to 2024.

Overall, the employment data for May continues to show a certain level of resilience, supporting the Federal Reserve's "wait-and-see" stance and its cautious approach to interest rate cuts. Fed Watch data indicates that the Federal Reserve is highly unlikely to cut interest rates in June and July, with a 51.8% probability of a rate cut in September, down from 54.3%, showing limited change. However, the market originally had limited expectations for rate cuts. On June 6, the three major U.S. stock indices all rose, reflecting the resilience of employment data and the understanding in overseas markets that the relationship between Trump and Musk has not further deteriorated. The yield on the U.S. 10-year Treasury bond rebounded by 11 basis points to 4.50% that day