At the end of last week, we briefly commented on the U.S. employment report. Since it was paired with a discussion of foreign exchange positions, we focused mainly on the currency market. Today, we’ll take a broader look at the scenario of a moderate cooling in the U.S. economy behind the data.
To sum it up in one sentence: this employment report was better than the market’s pessimistic expectations, but it cannot be called “strong”... Beneath data that still look fairly decent overall, there are indeed signs of some weakness within the report.
1) The market’s first focus is employment growth: government employment accounted for nearly half of this month’s job growth, and these government hires were concentrated mainly in state and local education systems. Our view is that there may be seasonal distortions here, which means the data could see a payback effect over the next few months, with some of these new jobs being reversed.
2) If government employment is excluded and we look only at private-sector job gains, they do show that growth is continuing to slow: from a seasonal-adjustment perspective, employment growth will also face greater challenges over the next few months, so overall nonfarm payrolls are unlikely to look as strong as they did in recent months.
3) However, this slowdown is not necessarily worrying. The labor market’s current break-even rate of job growth—that is, the minimum number of new jobs needed to keep the unemployment rate stable—is moving lower. A key factor behind this is slower immigration and slower labor-supply growth.
Chart: Weekly Wrap 250608
This means that as long as monthly job growth remains around 10 hundred thousand, its trend pace will be sufficient to keep the unemployment rate at its current level. The household survey also shows a slight decline in the unemployment rate, indicating that despite the slowdown in nonfarm payrolls, the situation is not serious from the perspective of unemployment.
Overall, this report does not look good, but it is not bad enough to warrant panic. Taking the headline figures together with the underlying weakness, it is not a report that inspires excitement, but it is not the kind of disastrous employment data the market feared either.
For the Fed, the most direct conclusion from the data is that they rule out the tail risk of an emergency rate cut in 7.
In other words, this report is enough to dispel the possibility that the Fed would be forced to cut rates in 7 because of a collapse in employment data. Whether rates are cut next will depend entirely on the combined performance of all upcoming economic data. This also means the market and the Fed will continue to focus on the interaction between employment reports and inflation data, rather than making a judgment based on a single data point.
This remains a process of moderate cooling, not a scenario of rapid deterioration.
Chart: Unemployment-rate dynamics and credit assets
However, it should be noted that there is a plausible case for the Fed’s rate-cut path to begin earlier and proceed faster:
Based on the tariff effects implemented so far, the monthly data showing their pass-through to inflation have been clearly a little milder than expected, easing our concerns about inflation persistence. Even with tariff-related disturbances, the absolute magnitude of inflation is not excessive, which allows us to turn our attention to other components of inflation.
As for core inflation, once the effects of tariffs are excluded, underlying inflation has fallen materially, and major components such as housing inflation have returned to levels consistent with the 2% target. So, if the market absorbs the tariff effects and underlying inflation is also markedly moderate, normalization of the policy rate (that is, beginning to cut rates) could start earlier.
In this environment, the Fed has reason to return to the neutral rate more quickly. Combined with signs of a slowing labor market, although the nonfarm payrolls report slightly reduced the sense of urgency around rate cuts, the overall picture still supports a path of beginning cuts in 9. After all, many data releases will arrive between now and 9, and only marginally weaker inflation and slightly softer employment would be enough to bring this path about—there are many possible ways it could unfold.
Finally, regarding the data:
ADP is very poor at forecasting nonfarm payrolls..... The main reason is that nonfarm payrolls themselves do not reflect actual changes in employment very well.
2025.07.07