On June 6, the United States released the latest non-farm payrolls report for May. The data looks "lukewarm" on the surface, but if you analyze it a little, you will find that the implicit trend is quietly changing the market's expectations for the Fed's interest rate cut path.
Stable on the surface, but hidden fluctuations
First, let's look at the unemployment rate: the official figure is still 4.2%, which seems to have not changed much. But Nick Timiraos, a reporter from the Wall Street Journal who is known as the "Fed's mouthpiece", pointed out that the real unemployment rate without rounding is actually 4.244%, higher than 4.187% in April and even higher than the high of 4.231% in November 2023. This means that this is the highest unemployment level since October 2021.
From this perspective, the US job market is not as solid as we thought, but is weakening in an unnoticeable way. This is not an instant collapse, but a signal of a slow warming: the economy is beginning to struggle, companies are beginning to be cautious, and layoffs or job vacancies may gradually increase.
Although the total employment data is okay, the manufacturing sector is actually struggling. The number of U.S. manufacturing jobs in May fell by 8,000, which is worse than the market expectation of -5,000, indicating that factories have begun to "lay off employees to relieve pressure." You know, the manufacturing industry has always been a "thermometer" of the economy, and now it has caught a cold, which means that the overall economy is also struggling.
Stronger wage data increases the risk of stagflation
On the other hand, wage growth continued to remain high. Average hourly wages in May rose 3.9% year-on-year and 0.4% month-on-month, both higher than market expectations. This shows that although the labor market has cooled, "wage inflation" is still sticky.
In other words, employment is slowing down, but price pressures remain. This is precisely the "stagflation" pattern that is most troubling to the Federal Reserve: economic activity is weak, but inflation is not falling.
The Fed is in a dilemma
At present, the Federal Reserve is facing the following situation: on the one hand, seeing the unemployment rate quietly rising and the labor market gradually weakening, theoretically it should consider a moderate interest rate cut to support the economy; but on the other hand, indicators such as wage growth and service inflation are still relatively strong, and if interest rates are cut too early, it may bring new risks of inflation rebound.
Therefore, "whether to cut interest rates" is no longer a technical debate, but a game of politics and risk management.
In other words, the Fed is now more worried about "cutting too early" rather than "waiting too late." But if the unemployment rate continues to break through key points (such as 4.5%), it will force them to act in the third or fourth quarter.
Market expectations are being fine-tuned
The current market still generally expects that the most likely time for a rate cut is September or November 2024, but the path has become more cautious and the pace has been further delayed. A rate cut in June is basically ruled out, and in July is almost impossible. The key is to look at:
• Will the core inflation data continue to decline in June and July?
• Whether the unemployment rate will stabilize below 4.2%, or rise further
• Are consumer and business confidence indicators weakening simultaneously?
If economic data continues to send out the combined signals of "weaker employment + easing inflation", the Federal Reserve may start cutting interest rates in September; but if inflation remains high, it may be forced to delay it until the end of the year even if unemployment rises.
Summary: Interest rate cuts are still possible in the second half of the year, but the path is narrowing
Judging from the current data, the Fed still has room to cut interest rates this year, but this is not a signal of the "start of an easing cycle", but more likely a "corrective fine-tuning". Unless the economic downturn is more obvious and the unemployment rate jumps sharply, the Fed will not easily start a series of interest rate cuts.
This means:
Rate cuts may come, but they won’t be fast or substantial.
For the market, it is necessary to adapt to a new normal of "cautious interest rate cuts + higher interest rates for a longer period of time".
