Guosheng Securities Inc. has released a research report analyzing the recent market movements. In the short term, the report suggests that global liquidity is likely to face significant constraints from potential substantive interest rate hikes. This environment is expected to lead to a genuine correction for growth-oriented assets, such as technology stocks.
Looking at the medium term, the report notes that the current AI-driven technology rally is underpinned by strong industry trends and earnings support. Furthermore, the path for the Federal Reserve to raise rates is fraught with obstacles, and the broader geopolitical direction between the US and Iran appears to be moving towards easing. Consequently, Guosheng Securities Inc. believes that after the current adjustment, technology stocks may present a fresh opportunity for strategic positioning. Investors are advised to monitor four key areas: developments in US-Iran relations and oil price trends, the US CPI data for May (released June 10th), the mid-June policy meetings of major central banks, and the initial policy stance from Fed Governor Waller (expected around June 18th).
The report highlights that the US May non-farm payrolls significantly exceeded market expectations, with previous months' data revised upward, and the unemployment rate held steady for a second consecutive month. Updated market expectations now show a sharply increased probability of a Fed rate hike, with pricing beginning to factor in one hike in the fourth quarter. The European Central Bank and the Bank of Japan are also highly likely to raise rates at their mid-June meetings.
In reality, the current period of elevated oil prices has persisted for over three months. The market has primarily been trading on the expectation of rate hikes rather than the actual event—a risk akin to a "gray rhino" stemming from high oil prices. Following the latest data release, US Treasury yields and the US dollar rose notably, while US equities and gold prices declined sharply.
Key Event and Data Points
On June 5th at 20:30 Beijing time, the US Labor Department released the May non-farm payrolls report.
1. US non-farm payrolls increased by 172,000 in May, far surpassing the expected 88,000. The unemployment rate was 4.3%, matching expectations and the previous reading. The March and April non-farm payroll figures were revised up by a combined 93,000.
2. Among 14 industry sectors, 10 showed positive job growth while 4 declined. Leisure and hospitality services (+70,000) contributed the most gains; the financial sector (-22,000) was the largest detractor. Government sector employment rose significantly (+52,000), primarily driven by hiring in local government (+55,000).
3. Post-data release, US Treasury yields and the US dollar advanced, while US stocks and gold fell sharply, reflecting heightened expectations for interest rate hikes. Interest rate futures now fully price in one rate hike within the year, with a 63% probability of a hike by October 2026.
Detailed Analysis
1. US May non-farm payrolls continued to greatly exceed market expectations, with the unemployment rate holding steady for two consecutive months. Overall performance: The US added 172,000 non-farm jobs in May, significantly above the 88,000 forecast. The unemployment rate was 4.3%, matching expectations and the prior figure. The labor force participation rate was 61.8%, also in line with expectations and the previous reading. The average workweek held at 34.3 hours. Average hourly earnings rose 0.3% month-over-month, higher than the prior month's reading and matching expectations. Regarding data revisions, March's job gains were revised up from 185,000 to 214,000, and April's from 115,000 to 179,000, a total upward revision of 93,000.
Sector performance: Among 14 industries, 10 saw job gains and 4 saw losses. Specifically, leisure and hospitality (+70,000) contributed the most, indicating continued resilience in consumer services spending, potentially boosted by demand related to the FIFA World Cup hosted by the US, Canada, and Mexico. Education and health services (+40,000) continued to provide stable support, with healthcare adding 35,000 jobs. Construction (+17,000) saw continued growth, likely driven by data center, energy, and AI infrastructure projects, with non-residential building construction (+2,000) employment growing for seven consecutive months; data centers now account for 2.3% of total US construction spending. Manufacturing (+7,000) turned slightly positive. Negative contributions mainly came from the financial activities sector (-22,000) and the information sector (-2,000), as US tech and finance companies continue workforce reductions. Wholesale trade (-4,000) and retail trade (-1,000) also showed weakness. Additionally, government sector employment saw a substantial increase (+52,000), primarily from local government hiring (+55,000), though the sustainability of this trend requires observation.
2. Following the non-farm payrolls release, US Treasury yields and the dollar rose, while US stocks and gold fell sharply, with rate hike expectations heating up. Asset class performance: After the data, US Treasury yields and the US dollar moved higher, while US equities and gold weakened. As of the close on June 5th, the Dow Jones Industrial Average, Nasdaq Composite, and S&P 500 fell 1.35%, 4.18%, and 2.64% respectively. The 10-year US Treasury yield rose 5 basis points to 4.52%. The US Dollar Index gained 0.66% to 100.08. Spot gold fell 3.25% to $4,328.92 per ounce.
Changes in rate cut expectations: After the non-farm payrolls report, market expectations for Federal Reserve rate hikes increased significantly. Interest rate futures now imply 1.03 hikes by December 2026, up from 0.67, fully pricing in one hike within the year, with a 63% probability of a hike by October 2026. The peak expectation for the number of hikes by July 2027 rose from 1.23 to 1.73.
3. The "gray rhino" risk is gradually materializing; focus on four key points in the short term. Will major global central banks hike rates? As of June 5th, the Overnight Index Swap (OIS) market indicates a high probability that the ECB and the BOJ will raise rates at their June meetings. For the US, the significantly stronger-than-expected May jobs report and upward revisions to prior months' data show the US labor market remains resilient in the short term. Concurrently, with oil prices remaining elevated, US-Iran relations still complex, global supply chain pressures high, and rising risks of energy price pass-through to transportation, production, and services sectors, the pressure of rebounding inflation cannot be ignored. Statements from Fed officials and the Fed Sentiment Index suggest a recent re-strengthening of hawkish attitudes, with policy focus centered on inflation risks rather than slowing growth. Against a backdrop of economic resilience, low unemployment, and persistent inflation risks, the Fed lacks urgency to cut rates in the near term. A further decline in oil prices is seen as a necessary condition for the rate-cut window to reopen. The view leans towards the Fed most likely maintaining a wait-and-see stance for the remainder of the year, with conditions for a hike requiring further confirmation. If subsequent inflation and employment data continue to exceed expectations, the market will continue to trade on hike expectations, and the possibility of an actual rate hike cannot be ruled out.
Genuine Correction or Temporary Dip for Tech Stocks?
In reality, the current period of high oil prices has lasted over three months. The market has been trading more on the expectation of rate hikes rather than the actual event—the "gray rhino" risk from high oil prices. This is evidenced by the significant rise in US Treasury yields and the US dollar, and the sharp decline in US stocks and gold following the latest data release. In the short term, global liquidity faces a strong constraint from potential substantive rate hikes, indicating that growth-style assets like technology stocks are likely to experience a genuine adjustment. From a medium-term perspective, given that this AI-driven tech rally has strong industry trends and earnings support, coupled with significant obstacles to Fed rate hikes and a general trend towards easing in US-Iran tensions, Guosheng Securities Inc. leans towards the view that after the adjustment, technology stocks will present an opportunity for renewed positioning.
Focus on these four key points in the short term: 1) Continuously monitor developments in US-Iran relations and oil price trends. These factors not only affect short-term inflation trends but will also determine when the rate-cut window might reopen. Simultaneously, with further depletion of global crude inventories, the US-Iran situation may be approaching a tipping point.
2) The US May CPI data. Against a backdrop of strengthening employment and sustained high oil prices, market and Fed focus has shifted to whether inflation will reaccelerate, particularly paying attention to the pass-through of energy prices to core goods and services prices.
3) The mid-June policy meetings of major central banks. The ECB and BOJ are highly likely to raise rates at their mid-June meetings. Regarding the Fed, beyond关注ing adjustments to its growth, employment, and inflation forecasts, and whether the dot plot further tilts towards "higher for longer," attention should also be paid to whether Governor Waller signals any adjustments to the monetary policy communication framework, such as potentially downplaying the dot plot, forward guidance, and other communication tools to enhance policy decision flexibility. Any change in the Fed's communication mechanism could reshape the market's logic for pricing future interest rate paths.
4) Governor Waller's initial policy stance. Key focus areas include his assessment of recent inflation rebound, labor market resilience, and the interest rate path, as well as his selection of subsequent core inflation and core employment indicators. These could become important references for the market to reassess the policy outlook.
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