June Payrolls Face Early 'Major Test': Fed Rate Hike Probability This Year Soars, Global Assets Face Liquidity Shock

TradingKey - Due to the US Independence Day holiday on July 3, the June non-farm payrolls report, originally scheduled for Friday, will be released early on July 2.

This data, widely regarded as a barometer of the US economy, will not only directly influence the Federal Reserve's interest rate decisions in the second half of the year, but could also trigger a new round of volatility in global financial markets.

The market currently expects June non-farm payrolls to increase by 115,000 and the unemployment rate to remain at 4.3%. However, historical data shows that actual outcomes often exceed expectations, especially at this sensitive juncture of the Federal Reserve's policy pivot.

Labor market resilience becomes the focus of attention

The core focus of this non-farm payrolls report is whether the U.S. labor market will continue to demonstrate strong resilience. The May payrolls data triggered severe market volatility; at the time, expectations were for just 85,000, but the actual figure came in at 172,000, directly causing the Nasdaq to fall over 4% and gold to drop more than 3%.

Since the beginning of this year, the U.S. labor market has outperformed most analysts' expectations, with the unemployment rate remaining at a low 4.3%, well below the 5% warning threshold. This robust performance has also raised concerns at the Federal Reserve about wage-driven inflation, especially as energy prices cool, making tight labor market conditions a key factor influencing the trajectory of inflation.

Goldman Sachs presented a unique perspective in its latest report, forecasting that June non-farm payrolls will increase by 130,000, higher than the market consensus.

The bank pointed out that temporary jobs brought by the World Cup could significantly boost the month's data, with event-related hospitality, security, logistics, and event operations roles expected to contribute approximately 40,000 jobs.

Stripping out these temporary positions, the implied underlying trend of job growth has actually slipped to around 90,000. This adjusted signal better reflects the true state of the labor market.

Fed rate hike expectations heat up

Against the backdrop of the Federal Reserve's June meeting and hawkish signals delivered by Chairman Warsh, the market has begun to price in one more rate hike this year.

The CME FedWatch Tool shows that the probability of a September rate hike is currently priced at 61.6%. If the June nonfarm payrolls data shows strong performance, particularly with wage growth beating expectations, it will further bolster market bets on Fed rate hikes.

Newly appointed Fed Chairman Kevin Warsh is scheduled to speak at the ECB's annual forum on July 1. This will be the most critical policy bellwether prior to the July nonfarm payrolls data, and if he maintains his hawkish stance, it will further elevate rate hike expectations.

Recently, the US Treasury market has priced in rate hike expectations ahead of time, with the spread between 2-year and 10-year Treasury yields narrowing from a peak of about 75 basis points to just 31 basis points, driven primarily by short-term rates rising at a faster pace.

Federal funds futures pricing shows the December contract rate at around 3.9%, implying an approximately 80% probability of another rate hike by the end of the year. If the nonfarm payrolls data is unexpectedly strong, the yield curve will flatten further, and the US Dollar Index could also break through its current resistance zone near 102, triggering a tightening of global financial conditions.

How will gold, the US dollar, and US equities trend?

Different asset classes react differently to the non-farm payrolls data.

In the bond market, strong data would push U.S. Treasury yields higher, particularly at the short end; the U.S. Dollar Index could strengthen, exerting bearish pressure on metals such as gold, silver, and copper, which may face further downward pressure over the coming days or weeks.

The U.S. stock market faces a dual impact. On one hand, robust employment data signals economic resilience, which supports corporate earnings. On the other hand, rising rate-hike expectations will weigh on stock valuations, particularly for technology and growth stocks.

Ahead of the non-farm payrolls release, investors will also gauge labor market conditions through several employment indicators, including May JOLTS job openings, June ADP private-sector payrolls, and weekly initial jobless claims. These leading indicators will provide clues for the NFP report, with the market closely watching for any unexpected signals.

As the U.S. Independence Day long weekend approaches, trading volumes are expected to decline, and thin liquidity often means market volatility could intensify.

Against the backdrop of an uneven global economic recovery and persistent geopolitical risks, any unexpected reading in the non-farm payrolls data could trigger a chain reaction. Investors need to be fully prepared for potential market volatility.