The American labor market is showing signs of a further slowdown.

On June 4th, the U.SBureau of Labor Statistics released the latest Job Openings and Labor Turnover Survey (JOLTS) reportIt indicated that in April, job vacancies amounted to 8.059 million—marking the lowest level since February 2021. Moreover, the previous month's figures were revised downward from 8.488 million to 8.360 million.

The following day, a report from Automatic Data Processing (ADP) revealed that U.S

employment rose by only 152,000 jobs in May, the lowest increase in three months, and significantly below the expected 175,000. Additionally, data for April was revised down from 192,000 to 188,000.

The ADP employment report is often regarded as the "little non-farm" indicator, with more closely watched non-farm payroll data due for release this coming FridayAnalysts predict that the non-farm employment figure will show an increase of 190,000 jobs in May, with the unemployment rate remaining stable at 3.9%.

The labor market trends are further bolstering the prospect of interest rate cuts by the Federal ReserveMarket swaps indicate that traders have pushed their expectations for the Fed's first rate cut of 25 basis points from December to November, with some even hedging against a potential rate cut as early as September.

These expectations have translated into the capital markets, with U.S

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Treasury prices rising and yields decliningOn the day the JOLTS report was published, the yield on the 10-year Treasury dropped by nearly 10 basis points to its lowest level in three weeks; meanwhile, the yield on the 2-year Treasury, which is more sensitive to interest rate expectations, fell nearly 4 basis points, marking its fifth consecutive day of decline.

As the Federal Reserve enters its blackout period, Treasury yields may continue to dominate the market dynamics.

A Sluggish Labor Market

The JOLTS report highlighted that at the end of April, the number of job vacancies recorded at 8.059 million was significantly lower than the expected 8.35 million, representing the lowest figure since February 2021. Moreover, the ratio of job openings to those unemployed has dropped to 1.2:1, indicating that each job seeker has approximately 1.2 available positions, which is the lowest ratio since June 2021.

Specifically, the healthcare sector has seen job vacancies decline to a three-year low, while manufacturing has fallen to its lowest since late 2020. Concurrently, there has been a reduction in job demands in government positions and the accommodation and food service sectors.

In addition to the decrease in job vacancies, other metrics have shown minimal change, with the voluntary turnover rate remaining stable at 2.2% for the sixth consecutive month.

The ADP employment report further corroborated the assertion that the labor market is slowing down

According to the report, the significant decline in manufacturing has contributed to a deceleration in employment growth for May; annual wage growth has stabilized at around 5% for the past three months, marking the lowest level since 2021. Additionally, the pay increase for employees switching jobs has slipped down to 7.8% for the second consecutive month.

ADP Chief Economist Nela Richardson stated, "As we move into the second half of the year, both employment growth and wage growth are slowing downWhile the labor market remains robust, we are seeing notable weaknesses in producer- and consumer-related sectors, with almost all hiring coming from the service industry."

Officials at the Federal Reserve hope that this trend can continue without leading to mass unemployment, as it aims to control demand and curb inflation

This moderate cooling is anticipated to prevent the scenario of millions losing their jobs.

Goldman Sachs trader Cosimo Corda-Pisanelli indicated in a report that the recent expectations for interest rate cuts are more driven by the conditions in the U.Slabor market rather than a decline in inflation.

Powell had previously remarked after the May Federal Open Market Committee meeting that the “unexpected” deterioration of the labor market could lead to an earlier rate cut.

On June 7th, the U.SDepartment of Labor is set to release its employment situation report for May, which will present critical data on non-farm payroll increases and unemployment rates

Market predictions suggest a job growth of 190,000 while the unemployment rate is expected to remain unchanged at 3.9%.

The market continues to observe the Federal Reserve's next movesRonald Temple, the Chief Market Strategist at Lazard Asset Management, stated, “There is increasing evidence suggesting that the Federal Reserve should start loosening policy.”

The Federal Reserve's Wait-and-See Approach

Controlling inflation and stimulating employment are the two core missions of the Federal ReserveRecent economic data released is mixed, making the future of rate cuts increasingly uncertain.

Notably, key data from last week revealed significant downward revisions in both Q1 GDP and personal consumption expenditures (PCE), indicating a slowdown in U.S

economic growthThe latest Beige Book from the Federal Reserve mentions that although the U.Seconomy has continued to grow recently, increased uncertainties and concerns about various risks have clouded the economic outlook.

On the flip side, inflation continues to remain highMost economists anticipate that indicators of inflation such as the Consumer Price Index (CPI) and core measures will not return to the 2% mark until at least 2026.

As we move into this week, data released on June 3rd by the Institute for Supply Management (ISM) showed the U.SManufacturing Purchasing Managers' Index (PMI) for May at 48.7, a three-month low, missing expectations of 49.6, with April’s reading at 49.2. This indicates that the manufacturing activity in May has shrunk at an accelerating pace.

Conversely, the Markit Manufacturing PMI released earlier the same day showed a final reading of 51.3 for May, exceeding expectations of 50.9 and in line with the preliminary number of 50.9. The differing results from the two indices have created a complex picture of the manufacturing sector.

The fluctuation in data has caused the Federal Reserve's expectations for rate cuts to be in continual flux

At the start of the year, the market anticipated a cut in March, which was then postponed to June, and later to SeptemberJust over a month ago, traders had ruled out the possibility of cuts this year, yet confidence in cuts occurring prior to year-end has now been revived.

Dan North, chief economist at Allianz Trade, noted, “Interest rates in the U.Shave risen to a fairly high level, which has slightly slowed the labor marketHowever, on the other hand, the U.Seconomy remains in a relatively prosperous condition.”

This may explain why the Federal Reserve remains in a “wait-and-see” mode.

The next Federal Reserve interest rate meeting is scheduled for June 11-12. Based on the guidance given by Fed officials over the past six weeks, economists overwhelmingly agree that no changes will be made at this meeting

As for the meeting set for July 30-31, derivatives market traders assign just a 14% probability for a rate cut, while the odds for a cut in September are slightly over 50%.

A recent Reuters poll also indicates that the majority of surveyed economists expect the Fed to implement its first rate cut in September, with the possibility of either only one cut or none also still existing.

Future Path of U.STreasuries

Previously, Powell has expressed a lack of confidence in the decline of inflation, advocating for a prolonged monetary policy regime that reflects a "hawkish" stance.

This position is also reflected in the rising yields of U.S

TreasuriesStrategists Nathan Abuhof Jacobson and analyst Alex Kim at Wellington Management have pointed out that due to recent inflation data exceeding expectations, market expectations for the Fed to cut rates in 2024 have dropped from six to one or twoFrom the beginning of this year until the end of April, the yield on the 10-year U.STreasury has risen by over 80 basis points, with the Bloomberg U.SAggregate Bond Index returning approximately -3%.

The increase in Treasury yields has sparked a sell-off in risk assetsThis sell-off has notably pressured global sovereign bonds, with the exception of Chinese government bondsThe debt auction by the U.Sgovernment has met with a lackluster market response, experiencing weak demand not only for long-term bonds but also for short-term ones.

This reflects not only concerns regarding the severity of U.S

debt but also the postponement of rate cut expectationsThe persistent high levels of U.Srates suggest that the federal government's cost of borrowing remains elevated, indicating considerable risks in purchasing short-term bonds in the market.

In the wake of the release of the ADP report, on June 5, at the close of trading in New York, the yield on the 10-year benchmark Treasury dropped by 3.89 basis points to 4.2871%, while the yield on the two-year Treasury decreased by 4.19 basis points to 4.7285%. This continuation of the downward trend following the JOLTS report indicates a rising expectation for rate cuts.

Historically, rate cuts have opened up space for bond appreciation, which is typically seen as positive for the bond market

However, concerns related to the employment and manufacturing data raise worries that the Fed's rate interventions may aim at salvaging a recessionary economy, which, for investors betting on future expectations, does not bode well.

So, is it worth investing in U.STreasuries at this moment?

“Though the Fed's decision to delay rate cuts for an extended time may disappoint the market, it doesn't necessarily limit the arguments for holding bonds,” said Wellington ManagementThey pointed out that a similar situation happened from 2004 to 2006 during the Fed's tightening cycle: even with prolonged rate cut delays, bonds continued to outperform cash in most periods following the last rate hike in June 2006.

“We believe that investors should still consider shifting cash into bonds