US Jobs Beat Expectations, USMCA Negotiations Delayed, Fed Rate Hike Expectations Rise

Overview

This report is JPMorgan's weekly US economic outlook. The core view is that US May employment data was significantly strong, breaking previous concerns about 'AI leading to jobless growth' and showing that labor demand is re-synchronizing with economic output. Although oil prices fluctuated due to geopolitical conflicts, they remained relatively stable. The report forecasts that inflation will rebound in the short term due to energy and supply chain factors, thereby driving up Fed rate hike expectations. Furthermore, negotiations for renewing the United States-Mexico-Canada Agreement (USMCA) have reached a stalemate and are expected to be delayed, bringing long-term policy uncertainty.

Core views

The labor market demonstrates strong resilience and exhibits characteristics of a structural recovery. May non-farm employment increased significantly by 172,000, with a three-month average growth of 188,000, the best level in over three years. The leisure and hospitality sector contributed 70,000 jobs, primarily due to seasonal statistical distortions caused by the early occurrence of Memorial Day, rather than extra hiring for the World Cup. The report notes that despite seasonal disturbances, the decline in long-term unemployment and the increase in high-paying jobs indicate a solid fundamental labor market. The unemployment rate remained at 4.3%, but the institution expects that with the release of quarterly benchmark review data, there may be an upward revision of at least 20,000 per month in the future. Inflation faces upward pressure, with both CPI and PPI rising. Affected by tight energy supplies and rising freight costs due to the Middle East conflict, the report expects May CPI to rise 0.58% MoM and 4.3% YoY (up from 3.8%); core CPI is expected to rise 0.27% MoM and 2.9% YoY. Regarding PPI, final demand PPI is expected to rise 0.7% MoM and a cycle-high 6.3% YoY. Core goods and services prices remain firm, driven by energy cost pass-through and preventive corporate restocking. Monetary policy path reshaped, Fed rate hike probability rises. Strong employment data and sticky inflation have significantly cooled market expectations for Fed rate cuts, with trading even beginning to price in the possibility of rate hikes within the year. Although the report believes new Chair Warsh leans dovish, which will delay the formation of a consensus on rate hikes, it maintains the forecast that September 2027 will be the first rate hike point. The FOMC dot plot may remove rate cut expectations for 2026, shifting instead to neutral or rate hike guidance. USMCA negotiation stalemate intensifies, North American trade uncertainty rises. Mexico and Canada support extending the USMCA agreement for 16 years, but the US insists on raising rules of origin for automobiles (e.g., increasing regional value content from 75% to 82%) and including base tariffs. Due to significant differences between the parties, negotiations are expected to fail to complete by the July 1 deadline and will be delayed until next year or even longer. This could delay North American supply chain restructuring and increase compliance and investment costs for multinational enterprises. Global economic divergence, flexible policy responses in Asia. Global manufacturing PMI has rebounded to a five-year high, but Western services are weak due to geopolitical influences. China faces downside risks in Q2 but has huge potential for fiscal stimulus; the Reserve Bank of India chose to keep rates unchanged and stabilize the exchange rate through regulatory measures; Latin American countries have seen improved terms of trade due to rising commodity prices, but political elections have increased policy uncertainty.

Analysis framework

The report adopts a comprehensive analytical framework of 'High-Frequency Data Verification + Scenario Analysis + Policy Transmission'. First, by decomposing May non-farm data (such as distinguishing seasonal disturbances in the leisure industry, comparing ADP and BLS data, and analyzing short-term vs. long-term unemployment structures), noise is filtered out to judge the true trend of the labor market. Second, input-output logic is used to track inflation transmission, from crude oil prices and freight rates to core PPI components, and finally to the composition of CPI, quantifying the specific impact of energy shocks on prices. Finally, combining a political economy perspective, the report analyzes the bottom lines and gaming strategies of all parties (US, Mexico, Canada) in the USMCA negotiations, assesses the potential impact of policy delays on the real economy, and maps these macro variables into the Fed's policy reaction function.

Methodology notes

• Industry/Sector Analysis FrameworkVolume-Price Split

  When analyzing employment growth, decompose total changes into contributions from different sectors (e.g., leisure & hospitality, local government) and attribute them in combination with seasonal factors (e.g., holiday timing).

  This analytical method helps identify whether growth stems from real economic expansion or is an illusion caused by statistical definitions or one-off events (such as early holidays), thereby more accurately predicting trends for subsequent months.

• Event Gaming & Behavioral FinanceExpectation Gap/Expectation Management

  Analyze the difference between market pricing (e.g., implied rate hike probabilities in Fed Funds Futures) and the institution's own forecasts, and assess the guiding role of new leadership (e.g., new Chair Warsh) on policy expectations.

  By contrasting market overreactions (such as a sharp upward revision of rate hike expectations) with the institution's moderate judgment based on internal committee gaming, it helps investors understand the expectation correction process behind asset price volatility.

• Competition & Strategy Framework

  Analysis of Rules of Origin Gaming and Supply Chain Restructuring in USMCA Negotiations

  The report analyzes how the US uses requirements to increase localization rates in automobile manufacturing (such as high-wage worker ratios, sources of steel and aluminum) as bargaining chips to force trade partners to concede. This is a typical analytical method using market access rights for strategic pressure, used to assess the impact of trade policy changes on corporate costs and supply chain layout.

Key data

• May Non-Farm Payrolls Added172,000Three-year high, three-month average reached 188,000
• May Unemployment Rate4.3%Basically flat, but indicates a slow downward trend
• Expected May CPI YoY4.3%Significant rebound from previous 3.8%, driven by energy
• Expected May Core CPI YoY2.9%Slight increase from previous 2.8%
• Expected May PPI YoY6.3%Cycle high, MoM expected to rise 0.7%
• Brent Crude August Futures$93/barrelAlthough higher than last week's $91, far below early May high of $108
• Retail Gasoline Price~$4.20/gallonDown over 30 cents from recent highs
• USMCA Auto Rules of Origin ProposalRegional Value Content 82%US proposal to increase from current 75% to force production reshoring

Impact & implications

For the US, strong employment and rebounding inflation imply that the Fed's policy normalization process may be faster than market expectations, and high interest rates may persist longer, putting pressure on equity valuations but benefiting the steepening of the bond yield curve. For North American trade enterprises, USMCA uncertainty will suppress cross-border investment, especially as the automotive manufacturing industry may need to re-evaluate its cost advantages in Mexico. Globally, the temporary stability of energy prices has alleviated some recession concerns, but the continued presence of geopolitical risks makes global supply chain restructuring a long-term theme; Asian economies need to be wary of external demand fluctuations and exchange rate pressures.

Risks

• Continued closure of the Strait of Hormuz leads to soaring oil prices, triggering a secondary inflation shock.
• USMCA negotiations break down or evolve into a long-term annual review mechanism, leading to an escalation of North American trade friction.
• Changes in the political landscape after the US election lead to unpredictable shifts in trade policy.
• Continued decline in global services PMI, especially in Western Europe, may drag down global economic growth expectations.

What to watch

• May CPI and PPI data released later this week to verify if inflation rebounds as expected.
• FOMC meeting statement and dot plot updates, observing changes in guidance for the 2026-2027 interest rate path.
• Progress in USMCA bilateral negotiations, particularly signals of substantive compromise on auto rules of origin and tariffs.
• Subsequent release of US Quarterly Census of Employment and Wages (QCEW) data to confirm the magnitude of non-farm data benchmark revisions.
• Developments in the Middle East situation and diplomatic news related to the Iran nuclear deal, focusing on their impact on energy supply expectations.