The first U.S. jobs report under new Federal Reserve Chair Kevin Warsh is scheduled for release tonight, with market expectations pointing to a significant slowdown in employment growth. However, the FIFA World Cup's effect may artificially boost the numbers, potentially obscuring genuine signals of a cooling labor market.
According to the Dow Jones consensus forecast, non-farm payrolls for June are expected to increase by 113,000, a sharp decline from May's 172,000. The unemployment rate is forecast to hold steady at 4.3%. However, Goldman Sachs economists Ronnie Walker and Jessica Rindels note that the World Cup could add roughly 40,000 temporary jobs to the June report, primarily in leisure and hospitality, professional and business services, and trade and transportation. This has led Goldman Sachs to raise its overall forecast to 140,000. This implies that, after stripping out the World Cup effect, the underlying trend in the labor market may be weaker than the headline figure suggests.
The report's policy implications are also significant. In his first press conference on June 17, Warsh emphasized the 2% inflation target as the core of his policy focus and described the current labor market as "solid, even improving." Both Bank of America Securities and Barclays PLC believe a report that meets or exceeds expectations would support the Fed holding steady in July and pave the way for subsequent rate hikes. Money markets are currently pricing in about an 80% probability of a hike in September, with a 25-basis-point increase in October fully priced in.
World Cup Impact: Distortions in the Data
Goldman Sachs, citing private data from small-business payroll provider Homebase, noted that employment in the 11 World Cup host cities fell by just 1.2% year-over-year, compared to a 3.5% decline in other cities. Hiring in the hotel industry surged 9.5% year-over-year, showing a clear boost from the event.
Based on this, Goldman Sachs estimates the World Cup will contribute approximately 40,000 jobs to the June payrolls figure, leading to its 140,000 forecast, which is above the consensus of 113,000. Additionally, Goldman Sachs points out that while historical data shows an upward revision bias for the initial June payrolls reading, the figure has been revised down in subsequent months in each of the past four years, providing important context for interpreting this release.
Conversely, May's employment data was boosted by a significant increase in local government hiring, which analysts do not expect to repeat in June, posing a downside risk. Barclays PLC forecasts a June payrolls increase of just 100,000, well below consensus, and notes that, barring revisions, the three-month average for the second quarter will remain around 150,000, far above the first quarter's average of 73,000.
Converging Signals of a Cooling Labor Market
Multiple leading indicators point to a slowdown in June job growth. The ADP national employment report showed a gain of 98,000 jobs for June, below the expected 118,000 and the prior month's 122,000. ADP's chief economist stated the labor market is telling a "dual story of supply and demand," with longer job search times and labor constraints in some sectors, resulting in a net slowdown in job creation.
Regarding initial jobless claims, the week overlapping with the Bureau of Labor Statistics (BLS) survey window came in at 227,000, higher than the 210,000 during the May survey period. Continuing claims also rose from 1.785 million to 1.821 million. Pantheon Macroeconomics notes that both initial and continuing claims have trended higher since early May, consistent with payroll growth slowing below the breakeven level. Analysts caution that the Juneteenth holiday may have distorted that week's data, as seasonal adjustments have not fully accounted for the holiday's effect.
The employment component of the S&P Global June Manufacturing PMI declined for a second consecutive month, with manufacturing job cuts at their fastest pace since the 2020 pandemic and the steepest since 2009 excluding the pandemic. Service sector employment saw only a slight decline. Consumer confidence data also confirms cooling: the Conference Board's June survey showed the share of respondents saying jobs are "hard to get" rose to 22.5%, the highest since January 2021. The labor market differential (jobs "plentiful" minus "hard to get") fell 2.6 percentage points to +2.4.
Policy Direction Under Warsh: Inflation First, Rate Hike Expectations Rise
In his June 17 press conference, Warsh, in his first public remarks as Fed Chair, stated officials assess the labor market as "solid, even improving somewhat," and defined curbing inflation as the core task of his leadership. The latest economic projections lowered the year-end unemployment rate forecast from 4.4% to 4.3%.
Bank of America Securities wrote in a report that the real policy rate has eased by over 100 basis points since mid-last year while the net change in unemployment has been nearly zero, providing a basis for the Fed to reverse last year's 75-basis-point rate cuts. Bank of America Securities expects the Fed to begin hiking in September, forecasting a total of three hikes through 2026. If June payrolls meet or exceed expectations, the July meeting could become a "live" one, with current market pricing implying about a 33% chance of a July hike.
Barclays PLC notes that with payroll growth consistently above the St. Louis Fed's estimated 15,000 to 18,000 breakeven level and the unemployment rate nearly unchanged, the divergence between the household and establishment surveys continues. This combination is consistent with another hold in July while the policy committee continues weighing the case for tightening.
Market Reaction: Asymmetric Risks Dominate Trading Dynamics
Bank of America Securities emphasizes that the potential market reaction is clearly asymmetric.
Regarding positioning and expectations, a Bloomberg survey shows the market's median forecast for June payrolls has risen to a year-to-date high. Should the data disappoint, short positions could face forced covering pressure, with systematic strategy (CTA) short positions in front-end rates particularly vulnerable after this week's yield rebound. Bank of America Securities scenario analysis shows that if the unemployment rate rises to 4.4%, the 2-year Treasury yield could fall 5 to 20 basis points; if it drops to 4.2%, it could rise 5 to 12 basis points, showing an asymmetric magnitude.
The currency market also faces two-way risks.
Bank of America Securities points out that the U.S. Dollar Index (DXY) is near a 12-month high, driven by Warsh's hawkish stance and signals that half of the FOMC members support rate hikes. If the data is significantly weaker than expected, speculative long positions could face liquidation pressure, potentially causing the DXY to give back recent gains. However, if the data meets or beats expectations, the dollar could move further toward Bank of America Securities' Q3 target (EUR/USD at 1.12).
Views gathered by Goldman Sachs from several traders also indicate the market is racing to understand the "Warsh Fed" reaction function—whether it will tolerate AI-driven inflation for a time or proactively hike to cool the economy. Tonight's payrolls data, along with Warsh's upcoming speech at the Sintra central banking forum, will provide crucial clues to answering this question.
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