Is June's Non-Farm Payrolls Expected to "Cool Down"? UBS and Citigroup Warn: The Cooling Job Market May Accelerate Rate Cuts

The U.S. labor market is facing a significant slowdown. Both UBS and Citigroup's latest reports predict that the non-farm payroll data for June, to be released on the evening of the 3rd, will be far below expectations, with the unemployment rate possibly reaching a new high since 2021. The weak performance of the job market is becoming a key factor driving the Federal Reserve to consider an earlier interest rate cut.

In a research report on the 27th, UBS believes that the non-farm payrolls in June will only increase by 100,000, which is far below the average increase of 127,000 in the previous four months. Among these, the private sector is expected to add 95,000 jobs, while the government sector is expected to add 5,000 jobs. Notably, federal government employment is expected to decrease by 10,000, mainly due to natural attrition.

Citigroup's forecast is even more pessimistic, predicting that the non-farm payrolls in June will only increase by 85,000 jobs, significantly lower than the market's general expectation of 110,000 new jobs. Citigroup analysts point out that non-farm employment growth has slowed for several months and has faced significant downward revisions, a trend expected to continue in June, with overall risks skewed to the downside.

Regarding the unemployment rate, UBS expects it to rise from 4.24% in May to 4.28%, rounding to 4.3%, which would be the highest level since 2021. Citigroup predicts that the unemployment rate in June will rise to 4.4%. Both institutions believe that although the household survey employment numbers may rebound, there is uncertainty regarding changes in the labor force participation rate.

Multiple high-frequency indicators show that the labor market has weakened over the past 6 to 8 weeks. Among them, the number of continuing unemployment claims increased by 67,000 between the survey reference weeks of May and June, which is typically closely related to a slowdown in private employment growth.

Citigroup also emphasized a significant slowdown in hiring activities. The expected weakness in summer hiring poses substantial resistance to seasonal adjustments, as private sector employment typically increases by about 800,000 jobs in June.

Easing Wage Growth Pressure, Uncertainty Remains Over Immigration Policy Impact

Regarding wage growth, Citigroup expects that the average hourly wage in June will further slow to a month-on-month increase of 0.2% from 0.4% in May. This may partly reflect a rebound in working hours in sectors such as information and trade services, which performed particularly poorly in May. The downward impact of weak labor demand on wage growth is expected to outweigh the upward pressure from reduced labor supply. Leading indicators of wage growth trends, such as surveys from the National Federation of Independent Business, suggest that overall wages will further slow this year.

Notably, Citigroup analysts pointed out that changes in immigration policy may begin to have a more pronounced impact on employment data starting in June. In late May, two court orders supported the Trump administration's ability to revoke certain recent temporary work permits for immigrants. These orders affect hundreds of thousands of recent immigrants, but there is significant uncertainty regarding the timing and scale of the impact of policy changes on employment data.

Additionally, weak demand across multiple sectors indicates fundamental downside risks to employment, such as in the construction and leisure services industries, which may be affected by changes in immigration, as well as the ongoing decline in housing construction and weak tourism demand.

Federal Reserve Policy Outlook: Increased Probability of Rate Cuts in September, July Cut Possibility Not to Be Ignored

UBS maintains its expectation that the Federal Reserve will begin cutting rates in September, forecasting a total rate cut of 100 basis points for the year, higher than the 50 basis points anticipated by Federal Reserve participants. UBS believes that if June's job growth is relatively weak, or if the three-month moving average of private employment is revised to below 100,000 jobs per month, the likelihood of a rate cut in July will significantly increase.

Citigroup's forecast is similar to UBS, expecting that the Federal Reserve will restart its rate-cutting cycle in September, with a cumulative rate cut of 125 basis points by March next year, providing policy support for the U.S. labor market facing dual pressures of hiring difficulties and weak demand. Citigroup believes that the June employment report will further solidify a more pronounced dovish shift among Federal Reserve officials at the July meeting. If the unemployment rate rises more significantly (to 4.5% or higher), it may be sufficient to prompt the Federal Reserve to cut rates again in July. Even if the unemployment rate rises as expected, market attention to the possibility of a July rate cut will still increaseIn addition, if core inflation in June is particularly weak (again increasing by 0.1% month-on-month or even a "soft" 0.2%), it may persuade officials to cut interest rates in July.

Federal Reserve Chairman Jerome Powell reiterated in his congressional testimony this week that policy is in a good position and the committee has time to wait and observe the impact of tariffs. Although Governor Christopher Waller and Vice Chair for Supervision Michael Barr recently hinted at a possible rate cut in July, Powell continues to emphasize that policymakers can maintain a patient stance.

However, in the face of increasingly apparent signs of weakness in the labor market, the Federal Reserve's patience may be tested