The US Labor Department released the non-farm payrolls data for May, which came in significantly stronger than market expectations, with prior months' figures also revised upward. The unemployment rate held steady for the second consecutive month. Following this data release, market expectations for Federal Reserve interest rate hikes have increased substantially, with pricing now indicating a high probability of a rate 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 been trading on the expectation of rate hikes but has not yet fully priced in the actual event of rate increases—this represents the "grey rhino" risk of high oil prices we have consistently highlighted. Consequently, after this data release, US Treasury yields and the US dollar rose notably, while US stocks and gold prices fell sharply. In the short term, global liquidity will face the "strong constraint" of actual rate hikes, suggesting that growth-oriented assets like technology stocks are likely to experience a genuine correction. In the medium term, given that the current AI-driven technology rally is supported by strong industrial trends and earnings fundamentals, coupled with the significant obstacles the Fed faces in actually raising rates and the broader trend towards easing in US-Iran relations, we lean towards the view that after the tech stock adjustment, it will present another opportunity for strategic positioning. Key factors to monitor closely include: developments in US-Iran relations and oil price movements, the US CPI data for May (June 10th), major central bank policy meetings in mid-June, and the initial policy stance of the new Fed leadership (June 18th).
Key Data Points from the US May Jobs Report
The US economy added 172,000 non-farm jobs in May, far exceeding the consensus forecast of 88,000. The unemployment rate remained at 4.3%, matching expectations and the previous month's figure. The labor force participation rate held steady at 61.8%, and the average workweek was 34.3 hours. Average hourly earnings increased by 0.3% month-over-month, higher than the prior reading and in line with expectations. Notably, revisions added 93,000 jobs to the March and April reports combined, with March revised up to 214,000 from 185,000 and April revised up to 179,000 from 115,000.
Sectoral Breakdown of Employment Changes
Out of 14 major industry sectors, 10 saw job gains while 4 experienced losses. The leisure and hospitality sector was the largest contributor, adding 70,000 jobs, indicating continued resilience in consumer services spending, potentially boosted by demand related to the upcoming FIFA World Cup. Education and health services added 40,000 jobs, providing stable support, with healthcare alone contributing 35,000. Construction added 17,000 jobs, continuing its growth, likely driven by data center, energy, and AI infrastructure projects. Non-residential building construction employment has now grown for seven consecutive months. Manufacturing employment turned slightly positive, adding 7,000 jobs. The primary drags came from the financial activities sector, which lost 22,000 jobs, and the information sector, which lost 2,000 jobs, reflecting ongoing layoffs in US tech and finance companies. Wholesale trade lost 4,000 jobs and retail trade lost 1,000 jobs, showing relative weakness. Additionally, government employment surged by 52,000, primarily due to a 55,000 increase in local government hiring, though the sustainability of this growth warrants observation.
Immediate Market Reaction and Policy Expectations
Following the jobs report, US Treasury yields and the US dollar rose, while US equities and gold declined sharply. By the close on June 5th, the Dow Jones Industrial Average fell 1.35%, the Nasdaq Composite dropped 4.18%, and the S&P 500 declined 2.64%. The 10-year US Treasury yield rose 5 basis points to 4.52%, the US Dollar Index gained 0.66% to 100.08, and spot gold fell 3.25% to $2,328.92 per ounce.
Market expectations for Federal Reserve rate hikes intensified significantly. Interest rate futures now fully price in one rate hike by the end of the year, with a 63% probability of a hike by October 2026. The peak expectation for rate hikes by July 2027 increased.
Assessing Key Risks and Market Outlook
The "grey rhino" risk of persistently high oil prices is gradually materializing. Overnight Index Swap markets indicate a high probability that the European Central Bank and the Bank of Japan will raise rates at their June meetings. For the US, the much stronger-than-expected May jobs report and upward revisions point to continued short-term resilience in the labor market. Concurrently, with oil prices remaining elevated and the US-Iran situation complex, global supply chain pressures are high, increasing the risk of energy price inflation spreading to transportation, production, and service sectors. The Fed's policy focus appears to be shifting back towards inflation risks rather than growth slowdowns. Given the resilient economy, low unemployment, and persistent inflation risks, the Fed lacks immediate urgency to cut rates. A further decline in oil prices would be a necessary condition for the rate-cut window to reopen. The prevailing view is that the Fed will most likely maintain a wait-and-see stance for the remainder of the year, requiring further confirmation of conditions for a rate hike. If inflation and employment data continue to exceed expectations, the market will keep trading on hike expectations, and the possibility of an actual rate hike cannot be ruled out.
Evaluating the Tech Sector Correction
The key question is whether the tech stock sell-off represents a genuine correction or a temporary setback. The market has been trading on rate hike expectations fueled by high oil prices for months without facing the reality of actual hikes. The post-data reaction—rising yields and dollar, falling stocks and gold—supports this. In the short term, the impending "strong constraint" of actual global rate hikes suggests growth assets like tech stocks are likely in for a real adjustment. However, from a medium-term perspective, the AI-driven tech rally is underpinned by solid industrial trends and earnings. Combined with the significant hurdles the Fed faces in implementing hikes and a broader trend towards de-escalation in US-Iran tensions, we believe the post-adjustment phase for tech stocks could present a fresh opportunity for investors.
Critical Factors to Monitor in the Near Term
Investors should closely watch four key areas: 1) The progression of US-Iran relations and the trajectory of oil prices. These factors directly influence short-term inflation trends and will determine when the window for rate cuts might reopen. Global oil inventory drawdowns suggest the US-Iran situation may be approaching a critical juncture. 2) The US Consumer Price Index data for May. With a strengthening labor market and high oil prices, market and Fed focus has shifted to whether inflation will re-accelerate, particularly watching for pass-through from energy prices to core goods and services. 3) Major central bank policy meetings in mid-June. The ECB and BoJ are highly likely to hike rates. For the Fed, beyond updates to growth, employment, and inflation forecasts and any shift in the "dot plot" towards a "higher for longer" stance, attention should be paid to whether the new leadership signals changes to the monetary policy communication framework, potentially deemphasizing tools like the dot plot and forward guidance to increase policy flexibility. Such changes could reshape market pricing logic for future rate paths. 4) The initial policy stance and commentary from the new Federal Reserve leadership. His assessment of recent inflation rebounds, labor market resilience, and the interest rate path, along with his selection of key indicators like core inflation and core employment to watch, will provide crucial references for the market to reassess the policy outlook.
Key Risk Factors
Potential risks include US economic and inflation data, Federal Reserve monetary policy decisions, and geopolitical conflicts continuing to exceed expectations.
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