Why can't the non-farm payrolls "scare" the market?

Last night's data and the market indicate that good "psychological construction" has turned data shocks into "treasures"? First, the ADP data showed a significant weakness, followed by media outlets like WSJ emphasizing that even if the data exceeds expectations, employment is not as good as it seems; and the June non-farm payrolls indeed "cooperated" very well: there was a surprise, with June data showing high resilience compared to the expectation of less than 110,000 new non-farm jobs (marginally rising to 147,000), and the unemployment rate fell more than expected; however, it also revealed "flaws," as both hours worked and wage growth fell short of expectations. The market performance highlighted a confidence, even complacency, of "as expected," with the S&P and Nasdaq reaching new highs, and the dollar stabilizing and rebounding.

If the dollar and U.S. stocks want to continue rising together, it means the market must abandon its "previous grievances" against dollar assets, but we believe the current conditions are far from mature. The U.S. economy has not escaped the shadow of stagflation, and the imbalance of debt supply and demand, along with the independence issues of the Federal Reserve, could become new sources of volatility. Especially for the dollar, which is a focal point of vulnerability, we are more inclined to view this as a phase of consolidation before further declines.

For the Federal Reserve, this is relatively "reassuring" data, with short-term employment risks being controllable, further solidifying the Fed's wait-and-see stance. The urgency for the Federal Reserve to "intervene" in the labor market and the economy has decreased.

In our report "Is the Market Too Optimistic About Rate Cuts?" we pointed out that the current market expectations for rate cuts are overly optimistic, and the path to rate cuts may not be so smooth. Subsequent stubborn inflation data, the pace of dollar weakening, and the resilience of employment data will all serve as markers for pausing or halting rate cut trades. The June non-farm payrolls are the best proof that while the economy may slow down, it may not do so quickly. After the data was released, the market basically abandoned bets on a rate cut in July, and the number of rate cuts expected this year was also revised down to two.

For the market, the combination of "better-than-expected job growth + declining unemployment rate + slowing wages" provides investors with a decent positive economic feedback. After the data was released, U.S. stocks did not decline due to weakened rate cut expectations; instead, they continued to reach historical highs, while the dollar stabilized and U.S. Treasuries were sold off.

However, it is worth noting that the current volatility of U.S. assets is at an extremely low level, and any continued verification or strengthening of the markers we mentioned above could amplify market volatility, becoming an important catalyst for a shift in U.S. stocks.

Specifically, why did non-farm employment increase significantly in June? The main reason is the strong hiring demand from state and local governments. In June, state and local governments added 48,000 to 80,000 non-farm jobs month-on-month, which was the main driving factor for the increase in non-farm employment and one of the main reasons for the divergence between "big" and "small" non-farm data.

At the same time, the unemployment rate unexpectedly declined. In June, the unemployment rate in the United States dropped sharply from 4.2% to 4.1%, breaking the market expectation of 4.3%. From a breakdown perspective, the decline in temporary and supply-side unemployment was the main reason, with a significant decrease in the number of people unemployed due to returning to the labor market and ending temporary jobs.

In addition, the labor participation rate fell to 62.3%, slightly below market expectations, mainly due to a reduction in labor supply caused by immigration and other factors. At the end of May, the U.S. Supreme Court allowed the Trump administration to revoke the temporary legal status of about 532,000 immigrants from Cuba, Haiti, Nicaragua, and Venezuela, further clearing the way for the Trump administration to deport immigrants.

However, behind this excellent employment data, we still need to pay attention to some potential downside risks:

Clue 1: The federal government under "reform pains." Although the decline in federal government employment this month has marginally slowed, it may be more influenced by seasonal effects and sporadic factors. Since February of this year, federal government employment has experienced negative growth for five consecutive months. High-frequency data shows that the number of first-time unemployment claims in Washington D.C., Maryland, and Virginia (main government regions) has been significantly higher than seasonal levels this year, indicating that the impact of previous concentrated layoffs in the U.S. federal government is still ongoing.

In addition to the employment decline itself, we mentioned in the report "How to Understand the 'Fork' in the Dollar and U.S. Stocks?" that due to the impact of the federal layoff plan this year, there has been a shortage of personnel for data collection, which may affect the quality of data statistics. The resilience of non-farm employment and the divergence from many micro and high-frequency indicators may also be influenced by this.

Clue 2: Unexpected decline in private sector demand. In June, private sector employment unexpectedly declined, falling by 63,000 to 74,000 jobs month-on-month, mainly due to a slowdown in employment demand in the service sector. The service sector has maintained strong resilience this year, but the significant decline in June may indicate a certain signal of demand slowdown, which could weaken the vitality of U.S. consumption and economic growth going forward. Among them, education and healthcare (-32,000), wholesale trade (-10,000), leisure and hospitality (-9,000), and professional and business services (-7,000) saw the largest declines The manufacturing sector remains "lukewarm" under the impact of tariffs. In June, new employment in manufacturing continued the negative growth trend from May. Under the pressure of rising prices and increasing costs brought about by tariffs, the pressures faced by the manufacturing sector are growing. Additionally, with the end of the tariff suspension period on July 9, Trump may impose punitive tariffs on certain countries, and the "cloud" hanging over the manufacturing sector has not yet dissipated.

Clue Three: Slowing wage and hour growth. In June, the average hourly wage increased by only 0.2% month-on-month, below the expected 0.3% and significantly lower than last month's 0.4%. Furthermore, the average weekly working hours for private non-farm employees slightly decreased by 0.1 hours to 34.2 hours. On one hand, the moderate wage growth may help alleviate the Federal Reserve's pressure regarding inflation, but on the other hand, it also suggests a certain risk of declining recruitment demand.

In addition, high-frequency data shows more signs of slowdown. In particular, the number of initial unemployment claims and continuing unemployment claims in the U.S. has remained high since the end of May, far exceeding the recent average, indicating an overall increase in employment difficulty. This aligns increasingly with the downward risks indicated by the consumer confidence index and the employment component of the PMI. The impact of tariffs is gradually eroding the vitality of the economy, affecting corporate behavior and recruitment demand.

Author of this article: Shao Xiang, Source: ChuanYue Global Macro, Original title: "Why Doesn't Non-Farm Employment 'Scare' the Market? (Minsheng Macro Tao Chuan Team)"

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