US labor market preview: Rising unemployment to shape Fed path

Investors are bracing for critical US labor market data due this week, with expectations pointing to a slowdown in hiring and a potential rise in unemployment. The figures could have significant implications for Federal Reserve policy, particularly as markets remain on edge over tariffs, political uncertainty, and global growth concerns.

US Employment Outlook: Payrolls to Slow, Unemployment to Rise

Bloomberg Economics expects June’s US jobs report to reflect a mixed labor market:

• Nonfarm payrolls are projected to rise by 120,000 jobs, down from 139,000 in May, yet slightly above current consensus estimates of 110,000.
• Private sector hiring is expected to slow, adding approximately 100,000 jobs, compared to 140,000 in the prior month.
• The slowdown is concentrated in service industries, particularly education, professional services, and leisure sectors, reflecting softer consumer spending and reduced demand in tourism and hospitality.

Despite steady headline payroll growth, underlying job creation could be overstated by around 80,000 per month due to the Bureau of Labor Statistics’ adjustment model for business formations and closures.

Unemployment rate:

• The unemployment rate is forecast to rise to 33%, up from 4.24% previously, with a risk of reaching 4.4% if labor-force participation rebounds to April levels.
• The labor force saw a sharp contraction of 625,000 participants in May, largely driven by individuals exiting the workforce despite expressing a desire for jobs.
• Seasonal distortions and policy changes, including the Trump administration’s revocation of federal contracts and immigration policy shifts, contributed to reduced participation rates.

Wage Growth:

• Average hourly earnings are expected to increase by 4%, with wage pressures remaining subdued due to job losses being concentrated in lower-paid sectors like leisure and hospitality.

Labor market trends and sector breakdown

• Leisure and Hospitality: Seasonal hiring is expected to be weaker than usual, with business travel and consumer sentiment still below pre-pandemic levels.
• Education: Job losses of approximately 6,000 are forecast, reflecting a deeper-than-usual summer contraction in teaching positions and the impact of federal spending cuts.
• Professional and Business Services: Expected to shed 19,000 jobs, continuing the trend decline seen in May.
• Manufacturing: Slight contraction possible, though offset by nonresidential construction strength driven by Biden-era stimulus.

Beyond June, government hiring and public education are likely to drive payroll growth, though cuts to federal grants could offset some gains.

Implications for Federal Reserve policy

The expected rise in unemployment could pressure the Fed to ease policy later this year:

• Bloomberg Economics maintains the view that the Fed will likely cut rates once, during the final meeting of 2025.
• Policymakers remain focused on inflation data due later this summer before committing to further monetary easing.
• The trade war’s limited immediate impact on payrolls suggests that labor market softness stems more from domestic demand dynamics than external shocks.

Broader market considerations

• A higher-than-expected unemployment reading could trigger renewed volatility in equities, bonds, and currency markets, particularly as investors adjust Fed rate cut expectations.
• Markets remain highly sensitive to upcoming economic releases and political developments, including trade negotiations and fiscal policy debates in Washington.

Key data to watch

• June Nonfarm Payrolls: Forecast at 120,000 (consensus: 110,000).
• Unemployment Rate: Expected to rise to 4.33%, with risks of 4.4%.
• Average Hourly Earnings: Projected to increase by 0.4%.

Investor takeaways

• Be prepared for labor market-driven volatility across asset classes.
• Monitor Fed communications closely following the jobs report.
• Stay defensive with selective equity and bond positioning.
• Watch for further signs of consumer demand weakness and policy-related labor market disruptions.

With the US labor market showing signs of cooling and unemployment set to rise, central bank policy and market sentiment will hinge on the upcoming data and inflation trends in the months ahead.

Prepared by Nour Hammoury, Chief Market Strategist at SquaredFinancial
Nour is an investor, independent market strategist, and financial advisor. He holds a BA in Finance and Banking Science from Al-Ahliyya Amman University and a CFTe in Economics from the International Federation of Technical Analysts. He has more than 15 years of experience in forex, stocks, and global economic developments, as well as central bank policies and intermarket analysis. He appears regularly on major international TV networks, such as BBC, Al-Jazeera, Al Hurra, CNBC, and Bloomberg, holding open discussions and sharing insights and readings of the markets and trends.

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