The Fed's interest rate cut expectations cool down again! "Mini non-farm" creates the best AI investment since early 2025, supporting the trajectory of a soft landing.

The U.S. ADP employment report, known as the "small non-farm" report, shows that U.S. companies added the most jobs in over a year in April, providing the latest substantial evidence of stabilization in the U.S. labor market. Data released by ADP Research on Wednesday showed that U.S. private sector employment increased by 109,000 in April, marking the strongest performance since early 2025, up from a revised increase of 61,000 in the previous month. While the increase of over 100,000 jobs in April was significantly below the median forecast of 120,000 jobs by economists, it was better than the average expectation of 99,000 jobs. The warming trend in ADP employment, driven by strong AI investment, has significantly reinforced economists' positive expectations for the U.S. economy to achieve a "soft landing," but it has also further weakened the dovish logic of a Fed rate cut this year. With employment data not significantly deteriorating, consumer spending holding up, and inflation picking up due to energy and tariff-driven factors, the Fed is more likely to maintain a cautious stance of "higher rates for longer." Specific statistics show that more than half of the hiring growth came from the healthcare and education sectors. Employment in the trade, transportation, and utilities sectors also saw increases. The growth in construction employment may reflect the construction process of large-scale data centers for AI training/inference, a core area of investment in the field of artificial intelligence. This is also evident in the recent surge and record highs in the stock prices of leaders in the AI computing industry, such as AI GPU/ASIC, data center CPU, HBM/NAND/HDD storage, 2.5D/3D advanced packaging, and liquid cooling. As shown in the above figure, U.S. companies continue to increase hiringadding 109,000 jobs in April, the highest in over a year under the wave of AI investment. Unprecedented AI investment wave drives continuous warming in the labor market. These latest employment data indicate that after a particularly challenging year in hiring environment, the U.S. labor market is stabilizing under the trillion-dollar AI computing infrastructure investment around AI data centers. Additionally, with clearer paths on tariff policies, immigration policies, and other fiscal stimulus policies, some large employers may now be more willing to increase their workforce, while overall layoffs in the U.S. economy remain low. With market expectations that peace talks between the U.S. and Iran will take an optimistic turn, and the strong performance of AI computing and robust financial reports overshadowing oil prices and geopolitical risks, Wall Street expects the strong rally in U.S. stocks to continue into May. On the same night, the three cloud computing giants Microsoft, Google, and Amazon delivered outstanding performance, highlighting the unexpectedly rapid growth of cloud computing businesses benefiting from the AI wave. These tech giants aim to convince more investors to believe that their massive investments in the field of artificial intelligence will soon yield record-breaking returns. A recent report by Morgan Stanley's analyst team projects a total capital expenditure of approximately $800 billion for the five mega-cap tech giants (Amazon, Google, Meta, Microsoft, Oracle) in 2026, which is expected to exceed $1.1 trillion in 2027, up from the previous forecast of $950 billion. Morgan Stanley analysts emphasize that behind these massive capital investments is the core logic of: first, reinvesting and building capacity, and then relying on the commercial revenue and ROIC recovery at scale based on AI computing resources; the sharp increase in cloud computing backlog orders is the most direct evidence that this logic works, and the unexpectedly rapid growth of their cloud computing businesses is leading Wall Street to reevaluate the business returns on AI. Senior economist Alex Pelle from Mizuho Securities USA stated in a report that "following a robust performance in March, the labor market continued its positive growth momentum in April." ADP employment data shows that job growth in U.S. companies in April was driven by small and micro-enterprises with fewer than 20 employees, as well as large enterprises with over 500 employees. Hiring was strong in the Western and Southern regions of the United States. Nela Richardson, Chief Economist at ADP and a well-known Bloomberg columnist, stated in a statement: "Both small and large employers are hiring, but we see weak performance in medium-sized manufacturing companies." The data report released by ADP in collaboration with the Stanford Digital Economy Lab also shows that the salaries of employees who switch jobs increased by 6.6% compared to the same period last year. Meanwhile, wages for employees staying in their current positions increased by 4.4%, slightly lower than the previous month. The U.S. government's employment report, to be released on Friday, is expected to show a more moderate pace of hiring in April; the previous month saw the largest increase in employment since 2024. Looking ahead, a key question is whether the Middle East geopolitical conflict, which has pushed inflation higher and dampened consumer confidence to record lows, will eventually transmit to the labor market. After the Fed maintained interest rates last week, Fed Chairman Jerome Powell stated that the labor market has shown "increasingly stable signs," which is one of the reasons why policymakers are in no hurry to lower the U.S. benchmark borrowing costs. The ADP employment statistics are based on payroll data covering more than 26 million U.S. private sector employees. The warming trend in ADP employment further weakens the prospects of a Fed rate cut, but also strengthens the expectation of a soft landing for the U.S. economy. Ahead of the release of the small non-farm ADP data, traders in the interest rate futures market had already significantly adjusted their expectations for monetary policy. Following the release of the data, expectations of a rate cut were further reduced, with traders pushing back the timing of the next Fed rate cut by 25 basis points to the middle of 2027, and some traders even pricing in the possibility of the Fed returning to a path of raising rates during this period. Prior to the outbreak of the Iran war, the market had priced in two rate cuts for this year. Since the Fed's FOMC lowered the policy rate range to 3.5% to 3.75% in December last year, the Fed has remained unchanged. Molly Brooks, a senior portfolio strategist in the U.S. rates group at Morgan Stanley, said, "Without any deterioration in growth, the Fed needs to first see price stability, and then needs to see several reports showing temporary inflation shocks and consecutive easing before feeling comfortable with the prospect of continuing rate cuts. The Fed's dual mandate has now become more focused on the inflation path, especially as recent labor market data has shown too much resilience." In April, private sector employment in the U.S. grew by 109,000, up from the revised 61,000 in March, indicating that companies have not significantly frozen hiring amidst high oil prices, tariffs, and geopolitical tensions. Additionally, with a 2.0% annualized quarterly GDP growth in Q1 in the U.S., although lower than expected, it is a clear rebound from the 0.5% growth in the fourth quarter of 2025. AI-related capital expenditures, government spending recovery, and core private demand continue to provide support. In other words, the U.S. economy has not seen a typical employment cliff before a recession, but rather shows typical characteristics of a "slowdown but still resilient" soft landing. The possibility of a soft landing seems imminent for Fed officials. Therefore, the latest ADP employment data further reinforce the market's expectation of a soft landing for the U.S. economy, but also weaken further the reasons for a recent Fed rate cut. With employment not deteriorating significantly, consumer spending holding up, and energy and tariff-driven inflation picking up, the Fed is more likely to maintain a cautious stance of "higher rates for longer." Only if subsequent non-farm, unemployment rate, actual consumption, and corporate layoff data show a continuous weakening, will the rate cut trade possibly regain decisive support. Some economists point out that with the labor market still resilient and inflation risks not subsiding, the window for a Fed rate cut is narrowing. Michael Feroli, Chief U.S. Macroeconomist at J.P. Morgan, stated that strong U.S. economic growth and sustained core CPI may remain high above 3%, predicting that the Fed will keep rates unchanged for the whole of 2026 and may even raise rates in the third quarter of 2027. Barclays formally changed its dovish policy forecast from a rate cut in September to predicting that the Fed will stay on hold for the whole year. The main reason is that high oil prices caused by the Iran war will permeate through all industries and keep the inflation rate high in the long term. With supply chain disruptions due to the war, another major Wall Street bank, Wells Fargo, and Deutsche Bank have also announced the withdrawal of their dovish monetary policy expectations for a rate cut in 2026.