Explosive non-farm payroll hits the "Fed's road to transformation" under Powell's leadership! Non-farm payroll surged by 172,000 in May, sparking a wave of interest rate hikes and igniting the "anchor of asset pricing".

In May, US non-farm payrolls exceeded all economists' expectations, while the unemployment rate remained unchanged at 4.3%, providing the clearest signal yet that the US labor market may be breaking free from the long-term recruitment weakness state. Following the release of the latest non-farm payrolls data showing a surge in hiring in May, interest rate futures market traders have priced in almost 100% certainty that the Fed will announce a 25 basis point rate hike in December this year, compared to before the strong non-farm payrolls data which had only a 60% probability of a rate hike in March next year. Some traders are even betting that with the Fed under the leadership of Wosh opening up reforms, a rate hike in October is possible. The US 10-year Treasury yield, known as the "anchor of global asset pricing," soared to over 4.5% after the non-farm payroll announcement, significantly cooling off the hot bull market dominated by AI computing power. The non-farm payroll data released by the US Bureau of Labor Statistics on Friday showed an increase of about 172,000 jobs in May after significant upward revisions in the data for the previous two months. This marks the strongest three-month non-farm job growth in over two years. These data significantly raise market expectations for the Fed's hawkish monetary policy, indicating that the Fed may consider raising rates this year to curb inflation. The non-farm employment report shows that after almost zero job growth last year, the US labor market is showing signs of strength in multiple industries, despite recent concerns about rising energy prices pushing consumer confidence to record lows. The May non-farm report has shifted the market narrative from "economic slowdown leads to easing" to a more challenging framework for Fed policymakers, where strong non-farm job data would strengthen rate hike expectations and push up short-term and long-term Treasury yields. This could particularly impact the 10-year and longer-term Treasury yields, causing financing costs expectations and the valuations of popular AI tech stocks to be severely hit. Immediately following the non-farm report, US stock index futures fell, while the yields on 2-year and 10-year Treasuries rose, indicating that the market's first reaction is not "economic resilience benefits the stock market," but rather "the labor market provides ammunition for the Fed's hawks." After seven consecutive trading days of decline, the US 10-year Treasury yield started to rise on Tuesday, with strong non-farm data likely to continue the upward trend in the 10-year Treasury yield in the short term. On May 19th, the 10-year Treasury yield briefly surged to 4.7%, the highest level since January 2025, temporarily halting the super-bull market dominated by AI computing power and causing a significant setback in global stock markets. The 10-year Treasury yield, as the risk-free rate anchor of DCF stock valuation models, if it continues to rise, will not necessarily end the super-bull market driven by AI, but will face temporary downward pressure and may shift from a "valuation expansion bull market" to a "profit validation bull market." Additionally, if Wosh's "road to reform" involves revoking dot plots and forward guidance, it will undoubtedly increase market speculation on rate hikes and may significantly raise term premiums. US non-farm payrolls surpass all expectations, Fed rate hike bets return to Wall Street trading desks Following the data release, US treasuries, especially those with maturities of 10 years and longer, continued to be sold off, with the 2-year yield rising by about 9 basis points to 4.13%, and the 10-year Treasury yield breaking through the key level of 4.5% and hovering around 4.53%, while S&P 500 index futures extended losses. Interest rate swaps show that traders are pricing in almost 100% certainty of a 25 basis point rate hike before the end of the year, with some beginning to price in a rate hike in October. As shown in the chart above, US non-farm payrolls have surged for three consecutive months - marking the strongest three-month increase in over two years. Christopher Hodge, Chief US Economist at Natixis, stated that Friday's data is "further powerful evidence that the labor market is not a cause for concern." "We doubt whether this strength can continue indefinitely, but for now at least, the focus of Fed policymakers will remain firmly on fighting inflation." According to the data, leisure and hospitality led the job growth, adding slightly more than 70,000 jobs in May, the most in over three years. The healthcare and social assistance sectors, which have been the main drivers of employment growth over the past year, continued to maintain a steady pace of recruitment. Non-residential construction employment increased for the seventh consecutive month, likely driven by strong demand for manpower brought about by the construction boom of AI data centers across the US. Another report this week showed that construction spending on data centers exceeded $50 billion for the first time in April. Manufacturing also added jobs in May. Recent reports have shown that as a result of strong demand from data centers, defense production, and broader inventory stocking needs, US factory activity has rebounded, with customers rushing to make purchases before further price increases related to war. Employment in the air transportation industry saw its largest decline since 2020. The US Bureau of Labor Statistics stated that this "largely reflects a company closure," which may refer to the collapse of Spirit Airlines last month. The report also includes signs of the continued impact of artificial intelligence on recruitment. The information sector, including software publishers, social networks, and internet search portals, saw a decline in employment again in May, marking the 16th decline in the past 17 months. Large tech companies like Meta Platforms Inc. and Microsoft Corp. are laying off employees, partly to offset the massive expenses on AI. In the coming months, the US economy still faces potential obstacles, especially if conflicts in the Middle East cannot be resolved quickly and the Strait of Hormuz remains effectively closed, keeping oil prices high. In this scenario, with tighter budgets, consumer spending may come under greater pressure - especially for low-income families. Furthermore, if the US stock market continues to experience a downturn under the pressure of rate hike expectations and the "anchor of global asset pricing" rising, this could weaken spending among wealthier households, while continued large-scale deployment of AI intelligent products by businesses could pose a greater threat to recruitment trends. Economists are closely monitoring how the dynamics of labor supply and demand affect wages, especially as inflation begins to outpace wage growth. The report shows that average hourly wages increased by 3.4% compared to the same period last year, remaining at the slowest pace since 2021. The employment report is comprised of two surveys - one for businesses and government agencies used to generate non-farm employment data, and one for households used to calculate the unemployment rate and labor force participation rate. The household survey has its own employment measure, which increased for the first time this year in May. The labor force participation rate, the percentage of the population working or looking for work, remained unchanged at 61.8%. The participation rate of workers aged 25 to 54, also known as the prime-age labor force participation rate, saw a slight increase. A broader measure of unemployment, including part-time workers for economic reasons and discouraged job seekers, saw a slight decrease. Other detailed indicators in the report show: The median duration of unemployment rose to 11.6 weeks, the highest since 2021. The Black unemployment rate dropped to 6.6%, the lowest since May 2025. The unemployment rate for college graduates dropped to 2.7%, the lowest since August 2025. Fed Chairman Kevin Warsh will preside over his first FOMC monetary policy meeting on June 16-17. It is widely expected that the Fed will keep the benchmark interest rate unchanged at this meeting, but with more officials calling for a signal of both rate hikes and rate cuts in the post-meeting statement, investors have raised the probability of rate hikes in the second half of the year. Recent reports have sent mixed signals about whether the labor market may be moving away from the dominant "low recruitment, low layoffs" environment of recent years. Job vacancies surged in April to the highest level since 2024, although the increase was concentrated in a narrow range. Layoffs remain near historical lows, but consumer views on job opportunities are slightly more pessimistic compared to recent years, and small businesses are reducing recruitment plans. The strong non-farm payroll data clashing with the "Fed's road to reform"! With the "anchor of global asset pricing" soaring, the AI super-bull market faces a "stress test" again Recent reports, citing sources familiar with the matter, have revealed that Warsh may lead the Fed away from the strong forward guidance framework of the Powell era to a more data-driven, less commitment-driven, and more market-tolerant counter-guidance central bank. As the strong non-farm data, exceeding all economists' expectations, coincides with the push by the new Fed Chairman Wosh to steer the Fed towards a so-called "road to reform", it will inevitably drive the "anchor of global asset pricing" even higher, making the AI super-bull market face another "stress test." Earlier this year, Warsh publicly opposed the dot plot and forward guidance path, which means that the dot plot, an important interest rate path anchor for the Fed and the market, may become a relic of history during Warsh's tenure. Warsh has stated that he wants to stop providing investors with "predigested" predictions. If the dot plot is canceled and the easing/tightening bias is removed from the statement, the market will lose an important interest rate path anchor, and policy uncertainty and fluctuations in the 10-year Treasury yield will likely increase, with the yield trend leaning heavily towards an upward direction. For global tech stocks, cryptocurrencies, and other risky assets, the key threshold is generally in the range of 4.5% - 4.8% for the 10-year Treasury yield. According to technical analysis data, if the 10-year Treasury yield breaks through the 4.70% - 4.80% area, it may confirm a trend of rising yields; when the risk-free rate continues to rise, stock risk premiums will be compressed, and there will be significantly limited room for stock market valuation expansion. This means that as long as the 10-year yield remains around 4.5%, the market can rely on the AI computing power infrastructure boom to drive AI profit upgrades and support risk appetite. However, if the yield effectively breaks through 4.70% - 4.80% or even approaches 5%, high valuation tech assets related to AI could face stronger discount rate impacts. The upward trend in yields will significantly compress the valuations of high PE semiconductors, AI software, unprofitable AI infrastructure, electric fuel cells, quantum computing, and space tech assets with high durations; but for AI leaders with locked-in orders, pricing power, buyback capabilities, and cash flows, the impact will mostly be seen as temporary volatility, rather than an industry logic collapse. If companies have strong profits, such as AI leaders continuing to realize profits, stock prices may still rise; but the room for valuation errors will decrease, and if there are disturbances in profit expectations, AI capital expenditure returns, oil prices, or fiscal deficits, the market will quickly reprice through higher discount rates and risk premiums. Recently, Morgan Stanley's strategy team stated that after the long-term Treasury yield enters the "danger zone," the overall US stock market still relies on AI and strong profits to support it, but the risk assets that can truly withstand high yields must have high free cash flow, pricing power, low leverage, a strong real profit growth path/production returns related to AI.