A stronger-than-expected non-farm payrolls report has pushed market concerns about a Federal Reserve rate hike to new highs—yet this panic over liquidity tightening may largely be the market "spooking itself."
On the evening of June 5th, Beijing time, the U.S. Labor Department reported the addition of 172,000 jobs in May, far exceeding the market consensus of 85,000. Following the data release, CME FedWatch indicated that derivative markets had fully priced in a Fed rate hike starting in December of this year. Assets sensitive to liquidity immediately suffered heavy losses: the 10-year U.S. Treasury yield rose 8.1 basis points in a single day to 4.55%, the Nasdaq index fell by 4.2%, and spot gold in London dropped 3.25%.
Analyzing the Data's Structure
In a report dated the 9th, analyst Zhang Wei noted that the unexpected strength of this non-farm data has distinct structural peculiarities and is difficult to interpret as a signal of broad-based economic overheating. Simultaneously, the severe K-shaped divergence in the U.S. economy persists, and inflation expectations in the real economy show no signs of becoming unanchored—neither condition meets the prerequisites for triggering a rate hike. The analysis suggests that the primary task for the new Fed Chair, Wash, is to maintain stability in nominal interest rates. Before advancing the broader goal of rebuilding monetary discipline, the immediate short-term role is to act as a "stabilizer."
It is worth noting that until the results of the Fed's policy meeting are announced in the early hours of June 18th, Beijing time, market concerns over liquidity are unlikely to dissipate quickly. A state of high volatility may persist, with risks of further adjustments. However, from a medium-term perspective, neither the liquidity environment nor the AI industry trend has deteriorated substantially, suggesting the technology bull market is not yet over.
Dissecting the Employment Surge
The seemingly impressive addition of 172,000 non-farm jobs in May reveals significant short-term distortions upon structural analysis. The report points out that the employment gains were highly concentrated in the leisure and hospitality sector within services (adding 70,000 jobs) and local government (adding 55,000 jobs), which together accounted for the vast majority of the increase.
The sharp jump in leisure and hospitality employment is closely tied to the upcoming FIFA World Cup. The tournament, jointly hosted by the United States, Canada, and Mexico, is scheduled to open on June 11th, U.S. time. With the number of participating teams expanding from 32 to 48 and matches increasing from 84 to 104—78 of which will be held across 11 U.S. cities, including the quarter-finals, semi-finals, and final—the proximity of such a large-scale event inevitably drives a short-term surge in temporary labor demand for service industries like food service and lodging.
This portion of the increase is deemed unsustainable, and a preliminary judgment on employment trends will require waiting until after the World Cup concludes. Interpreting this data as indicative of a broadly strengthening labor market and thus a necessity for rate hikes is argued to be unfounded from the data's base.
The Fragile K-Shaped Economy
Even setting aside the peculiarities of the non-farm data, the overall U.S. economy is far from reaching a point where rate hikes are needed to curb overheating. Data indicates the severe K-shaped divergence in the U.S. economy persists—aggregate figures appear acceptable, but structural pressures continue to accumulate.
On the credit front, Q1 credit card delinquency rates remained at 2.95%, with the serious delinquency conversion rate as high as 7.12%, both at post-pandemic highs. In real estate, April new home sales (annualized) stood at 622,000 units and existing home sales (annualized) at 4.02 million units, both below pre-pandemic levels and showing no effective rebound since the Fed began its rate-cutting cycle in September 2024.
Durables consumption also shows significant divergence. Driven by the AI industry trend, sales growth for electronics and electrical appliances rebounded from 3.1% year-on-year last November to 7.6% in April this year. However, sales growth for automobiles, home appliances, and home furnishings has continued to slow or turned negative, declining 1.4% and 3.6% year-on-year respectively in April.
This pattern of "easy monetary conditions in finance but tight conditions in the real economy" is identified as the core cause of the K-shaped divergence. The Fed's six rate cuts since September 2024 have failed to effectively lower financing costs for the real economy, and the spillover effects of the AI boom have yet to reach interest-rate-sensitive traditional economic sectors. Based on this, the current ailment of the U.S. economy is judged to be structural fragility, not overall overheating.
Inflation Expectations Remain Anchored
From an inflation perspective, the Fed also lacks grounds to initiate rate hikes. The Fed's core framework for assessing inflation anchors on two dimensions: whether inflation is forming a sustained upward trend, and whether long-term inflation expectations show risks of becoming unanchored. Currently, neither condition is met.
A wage-price spiral has not formed: the year-on-year growth rate of average hourly earnings for U.S. private sector workers has declined from 3.7% in December 2025 to 3.6% in April and 3.4% in May of this year.
Real purchasing power has turned negative: influenced by rising oil prices due to the outbreak of the U.S.-Iran war, U.S. CPI rose 3.8% year-on-year in April (up 1.1 percentage points from December 2025). Subtracting CPI growth from wage growth, U.S. residents' real purchasing power officially turned negative in April (down 0.2% year-on-year, a significant 1.2 percentage point drop from December 2025).
Inflation expectations are firmly anchored: the New York Fed's May survey showed median consumer inflation expectations for 1-year, 3-year, and 5-year horizons were merely 3.46%, 3.13% (even slightly lower than during the tariff friction period last April), and 3.02%, respectively. The real economy shows no signs of the panic stockpiling that precedes runaway inflation.
The Fed's Real Mandate
Synthesizing the above analysis, the Fed's most critical current task is neither to suppress overheating demand nor to combat inflation, but to maintain relative stability in nominal interest rates.
On one hand, the K-shaped divergence also extends to capital markets—tech stock valuations are highly sensitive to interest rates, as are the credit and consumption activities of traditional economic sectors. The more fragile the structure, the more it relies on a stable interest rate environment. On the other hand, even if the Fed were to initiate rate hikes, the tightening effect would only impact the interest-rate-sensitive lower end of the K-shape (traditional sectors like consumption and real estate), failing to restrain AI industry expansion. Such a move would essentially make the already fragile lower end of the economy pay for the AI boom, only exacerbating structural imbalances. Furthermore, if the AI industry trend itself weakens and its spillover effects fail to materialize, the K-shaped economy would converge from the top down, at which point the rationale for rate hikes becomes even more untenable.
The analysis therefore concludes that before Wash can realize the long-term vision of reshaping fiscal and monetary discipline and restoring dollar credibility, the immediate short-term need is to stabilize the situation. In fact, if capital markets, driven by unreasonable expectations, continue to push up nominal U.S. Treasury yields, the Fed may even need to release dovish signals or even cut rates to correct market deviations.
Consequently, the market's current rate hike expectations are, to a larger extent, a case of "spooking itself," with no substantive liquidity tightening in sight. While concerns over liquidity may continue to weigh on market sentiment until the Fed's policy meeting results are announced on June 18th, warranting caution over short-term volatility and adjustment risks, a longer-term view suggests that neither the liquidity environment nor the AI industry trend has fundamentally changed, and the foundation for the technology bull market remains intact.
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