Unexpectedly, May's "small non-agricultural" report in the United States warmed up: adding 122,000 new jobs, reaching a 16-month high. This reinforces the narrative of the Federal Reserve's "higher for longer" interest rates.

Despite the rising energy costs due to the Iran conflict, the American ADP employment data, known as the "small non-farm," reached a new high in May since January 2025, showing that the labor market may be accumulating growth momentum. Data released by ADP Research on Wednesday showed that the US private sector added 122,000 jobs in May, exceeding economists' expectations of 120,000 jobs. April's job growth data was slightly revised down to 105,000 jobs. Unlike the past few months where job growth was highly concentrated in a few industries such as healthcare, hiring in May showed a rare breadth. Eight of the top ten industries saw net job gains, and recruitment activities were relatively balanced in terms of business size and geographical distribution. ADP's Chief Economist Nela Richardson stated, "Recruitment activity in May was broader than in the past few years, and the labor market is entering the summer hiring season with sustained momentum." In terms of sectors, the education and healthcare services sector led with 57,000 new positions, followed by the trade, transportation, and utilities sector contributing 36,000 jobs. The professional and business services, leisure and hospitality, and construction industries also saw net growth. However, the information services sector saw a net decrease of 9,000 jobs, consistent with the trend of artificial intelligence (AI) technology accelerating the replacement of traditional manpower. The natural resources and mining sector also saw a decrease of 3,000 jobs. Regarding wages, the annual salary increase for employees staying in their current jobs remained at 4.4%, on par with April; the median increase for job switchers was 6.5%, slightly lower than April's 6.6%, but the premium for job switchers remained at historically high levels. The financial sector saw the highest salary increase for employees staying in their positions at 5.1%, while the information sector ranked last with a 4.0% increase. In terms of business size, small companies with fewer than 50 employees led with 67,000 new positions, while large companies with over 500 employees added 40,000 new positions. Concerns of inflation behind strong employment: Dilemma for the Fed This strong employment report comes at a critical juncture for the Federal Reserve's policy decisions. Recent inflation pressures in the US are resurfacing, with the Middle East conflict exacerbating these risks by driving up energy costs. According to the latest data, the Fed's preferred inflation gauge, the Personal Consumption Expenditures (PCE) Price Index, saw a year-over-year increase of 3.8% in April, reaching a new high since May 2023, well above the Fed's 2% policy target. Meanwhile, the latest University of Michigan survey showed that the final consumer confidence index for May in the US was 44.8, hitting a record low since records began in 1952. The resilience of the job market provides confidence for the Fed to maintain its restrictive monetary policy. However, the persistent rise in prices is causing more concerns for policymakers. The market widely expects the Fed to hold interest rates steady at 3.5% to 3.75% during the June 16-17 monetary policy meeting. CME FedWatch data shows a 98.3% probability of no change in rates in June, with a 10.5% probability of a 25 basis point hike in July. Several Fed officials have recently sent hawkish signals, with Cleveland Fed President Mester stating that if inflation does not fall over the next one to two quarters, the economy may need rate hikes. Boston Fed President Rosengren emphasized that interest rates should remain unchanged for "some time," as five years of persistently high inflation above the target has eroded her tolerance for another supply shock. Middle East conflict constrains policy space, consumer confidence at freezing point The ongoing Iran conflict has entered its fourth month, with sharp rises in energy and food prices becoming one of the largest external variables affecting the US economy and monetary policy. Policymakers are working to address the continued impact of this conflict on inflation and economic activity. The conflict in the Middle East has not only directly pushed up international energy prices but also transmitted upward pressure through supply chains to a broader price system, leading to a decline in consumer confidence. The decrease in the US consumer confidence index for May, as reported by the World Economic Forum, illustrates this decline in consumer confidence. New York Fed data shows an increase in delinquency rates for credit cards, car loans, and student loans, indicating deteriorating consumer financial conditions. The conflict's impact has led to a faster rise in US prices than in wage growth, resulting in a decrease in real income for the population. Citigroup's chief global economist Nathan Sheets stated, "The US government's tariff policy, along with the recent impact of the Iran conflict on prices of commodities such as oil, has led to a sustained increase in prices relative to wage levels." Nevertheless, the strong performance of May's employment data provides a positive signal to the market: despite the dual pressures of high inflation and declining consumer confidence, US companies' demand for labour is expanding, and the labor market has yet to show substantial signs of weakness. Major non-farm payroll report released on Friday, market awaits further confirmation ADP data is closely monitored by the market as a leading indicator of the non-farm payroll report. This Friday, the US Bureau of Labor Statistics will release the May non-farm payroll report, with Wall Street generally expecting job growth of 80,000 in May following an increase of 115,000 in April, with the unemployment rate remaining unchanged at 4.3%. It is worth noting that against the backdrop of ADP data surpassing expectations, some institutions have pointed out that this may increase the probability of Friday's non-farm payroll report exceeding expectations and reinforce the narrative of "maintaining high rates for longer." The upcoming non-farm payroll report, along with recent hawkish statements from Fed officials, may further reshape market expectations for monetary policy. In terms of industry distribution, the education and healthcare services sector is the absolute main driver of job growth in May, followed closely by the trade, transportation, and utilities sector, indicating that the service sector remains the core engine of job creation in the current economic environment. As the summer hiring season approaches, whether the labor market can continue to provide support for the economy will be a crucial variable in determining whether the US can withstand the impact of the Middle East conflict. After the data was released, US Treasury yields rose slightly, the US dollar index rebounded in the short term, while S&P 500 index futures continued their downward trend.