Yesterday’s NFP report released is important because it tells us that (1) the US economy and labour markets remain firm and (2) the FX market is finally paying attention to US economic performance. We have a USD-positive medium-term view, and the positive overall USD response does not surprise us. In yesterday’s May NFP report, total employment rose 172k, which, along with upward revisions, sent the three-month average to 188k—the best in just over three years. To give a context, the neutral rate for NFP is considered 50k currently. The unemployment rate ebbed just 4bp with the rounded rate holding steady at 4.3%. NFP tell us two facts: 1. The straightforward cyclical story – the US economy and labour market look firm 2. The market reaction to the NFP data. Asset markets (especially the FX market) are beginning to pay attention to economic data, setting aside the last 15 months’ concerns about tariffs, Greenland, oil, Iran, etc. This is reflected in the rise in US real interest rates to their highest levels since June 2025, and the 0.7% increase in the BBDXY after the NFP release. The only way one can counter the rate hike rationale is through the fact that the current pace of unit labour cost inflation in the nonfarm business and nonfinancial corporate sectors is very unthreatening. Markets are now pricing in a full 25bps hike from the FOMC by end-2026, and almost two hikes by mid-2027. So, the question we ask ourselves is: Can the next Fed action be a hike. We tend to think the market has over-responded to the hawkish side recently, after over-estimating how dovish year-end Fed policy would be earlier this year. Incoming Chair Warsh is likely to bring a more powerful dovish voice to the FOMC to replace outgoing Governor Miran, and Warsh is likely to have some allies on the Board and among some regional bank presidents, even as others (not all of whom are voters this year) have turned more hawkish. We expect it will be a more gradual process to reach consensus on the FOMC to hike rates, although we continue to see some chance it could occur by year-end. The jury is still out.
