The desk anticipates a significant deterioration in U.S. labor market data, particularly with the unemployment rate expected to rise, as outlined by George Goncalves of MUFG EMEA. Per the full note, this softening in jobs data is likely to prompt the Federal Reserve to consider rate cuts, potentially as soon as July, although Goncalves notes that a perfect scenario is required for such an action. The consensus among market participants is leaning towards a more dovish Fed, with expectations of cuts in September if July does not materialize. This backdrop sets the stage for potential volatility in FX markets, particularly for USD pairs, as traders adjust their positions ahead of the June NFP release.
What the desk is arguing
George Goncalves, Head of Macro Strategy at MUFG, expects the June NFP report to show continued labor market softening, with the unemployment rate trending higher. He sees this as evidence that the consumer is 'tapped out' despite easing policy uncertainty, arguing the Fed needs to cut soon.
Goncalves acknowledges the July cut is conditional on a 'perfect' data backdrop, but if skipped, he expects a September cut—with the risk of a 50bp move, echoing the 2024 deja vu scenario. The longer the Fed waits, the deeper the eventual cuts may need to be.
The desk implicitly rejects the narrative that a resilient US economy can avoid near-term easing, instead focusing on lagged effects of tight policy and fading consumer strength.
Where it sits in our coverage
We do not have a specific consensus target on a particular currency pair from internal coverage. The commentary is purely macro thematic on the US labor market and Fed policy, without explicit FX pairs mentioned.
Given the lack of firm-specific targets, we cannot cite our consensus or other banks' published Dec-26 targets. The analysis remains at the macro strategy level, suited for cross-asset implications rather than spot FX forecasts.
How other firms see it
While MUFG's dovish view aligns with some consensus expectations of a September cut, other banks like Goldman Sachs and Morgan Stanley may still see a resilient labor market delaying cuts. Without explicit published data, we note the divergence is typical between sell-side houses on NFP interpretation.
For a full picture, clients should refer to individual bank research notes on USD and Fed path scenarios.
Key takeaways
01MUFG sees June NFP showing softening labor market and rising unemployment, supporting a near-term Fed cut.
02A July cut is possible but requires perfect data; otherwise, September cut with potential 50bp move is the base case.
03The desk argues the consumer is tapped out, countering the view that policy uncertainty is the main drag.
Market implications
A dovish shift in Fed expectations could weaken the USD, especially if NFP surprises to the downside. Short-dated Treasuries may rally, and rate-sensitive FX pairs like EUR/USD could see upside. However, if data holds firm, the contrary risk is a USD bounce.
Risks to this view
The primary risk is a stronger-than-expected NFP print, which would delay Fed cuts and support USD. Additionally, sticky inflation or a geopolitical shock could force the Fed to hold longer, invalidating MUFG's view.
Welcome to the MUFG Global Markets Podcast. I'm John Cook, and I'm joined today by George Goncalves, MUFG's head of U.S. macro strategy. It's Tuesday, July 2nd, 2025.
Welcome back to the podcast, George. Great to be on, John. Good week to be on.
Yeah, I can't believe it's July. That's seems we're more than halfway through the year. Nuts.
And it's yeah, it's a short week, short and sweet week with a ton going on. I mean, we've already had you know, we had month end on on on Monday. We've got a bunch of you know, we've got some trade deals coming out of D.C.
You've got the one big beautiful bill progressing ton of economic data. I mean, just you know, and we have non-farm the non-farm payroll report on Thursday, which I think we're going to we're going to talk a little bit about. So let's see to to get in to get a question to you.
I think the setup into payrolls is interesting, and this is something we've talked about on the desk. You know, we've had continued weaker related employment data, you know, very notably, you know, ADP. And I'm not a fan of that number, but ADP, which was released on on Wednesday, which is the day we're recording this podcast, showed a negative print.
That's the first negative print since 2022. And you reminded me of this. But that's during that was during a week, sort of a string of weak GDP prints in the course of that year.
So I guess the question is for you, like, how are you thinking about the data? Is that how does that, like, tie with your macro view, go against your macro view? Talk our listeners through that.
Yeah, let's let's maybe kind of set the stage and think about it. And I generally agree with you that ADP has proven to be kind of a false indicator, but kind of working our way backwards. Yeah.
As you mentioned, super action packed week, a lot of information on the macro front, largely linked back to the an update on the jobs data in the jobs environment. ADP negative number is never a good number. I think you just have to say that straight, straight out.
Number two, a lot of it was in the smaller businesses of less than 50 employees, which have gone negative. And that clearly is showing weakness in the private sector. And there was a lot of high hopes.
If you look at like the NFIB surveys, there was a huge kind of bump, the Trump bump kind of animal spirits in Q4 into early Q1. A lot of expectations from small businesses. And yet, you know, the tariff shock slash kind of volatility that we've seen, and just really like, you know, not really a clear direction on some of these things.
And a lot of it is being held up. This uncertainty, which could pass, you know, once we get the one big, beautiful bill finally signed. But nonetheless, there's been a lot of kind of cross currents, which have at least kind of reduced that sort of animal spirits, number one.
But then, but beyond just the feelings and the sentiment, which a lot of policymakers, including, you know, Chair Powell has been very dismissive of, that the sentiment doesn't necessarily have to translate into the hard data. But guess what? The hard data also has been getting weaker, too.
And so I do think that like, if you look at like, you know, back orders, if you look at just like general activity has definitely decelerated. And even though Q2 is gonna look better than Q1, Q1 was abysmal. I mean, like Q1, like, started off with, at least it looked like the consumer was spending.
And now the consumer basically has had the weakest sort of spending patterns since 2011. You know, real retail sales is basically flat. This year, there's been real no spending from the consumer side, personal income has been very low.
And that all kind of hints at, you know, real deceleration in the labor market, because if you don't have income, or, you know, you have less spending power or disposable income. So I, you know, like, there's a lot there, a lot that kind of kind of paints the picture that we are due for the upcoming job prints to start to really reflect this. The jobs data, you know, I've been very critical of that data.
It's been overstated by the birth death model and all these sort of seasonal adjustments over the years. But at some point, it has to show up in the jobs data, we think it's going to start showing up in the coming, coming months, and maybe starting this week. That's, that's a good segue here.
And just to I mean, just to kind of be complete, like, I very much agree with you that that the data kind of under the hood doesn't doesn't look so good. I do think we those should acknowledge the stronger than expected jolts data. So so, you know, maybe just quickly talk us talk us through that, because I think you saw some underlying weakness in that in that print as well.
Yeah, I like the jolts data. I mean, we usually typically look at the headline. And that's largely because Fed Fed policymakers have really drawn our attention to the headline, how many job openings there are.
But it's, it's really the composition that matters. And also underneath, how many people are quitting versus how many hirings are really taking place. And we got a mixed signal there in this, in this last reading, which was as of May, not for June, by the way, it's always one month behind.
And so like, I don't know, and a lot of it was, you know, kind of focused in the travel and leisure, hospitality restaurant, which could be, you know, having impacts from what's happening on the immigration front. So there's a lot of like, noise potentially in that data. And in general, it's one of the worst responded surveys, that's from a data collection, like, so it could be garbage in garbage out and a lot of seasonal adjustments.
So I, I don't want to completely dismiss it, because it was a big jump of almost 500,000, I think. And it was way beyond what consensus was expecting. And that did put the rates market in a more defensive mode after a big rally.
But maybe that was just kind of a healthy kind of a healthy cleaning of what's going on out there a healthy kind of purge. Yeah, well, thanks for that. And let's let's segue back into the main event here.
We've got the the June employment report coming out on Thursday, which is the which is when most of our listeners will be listening to this episode, as opposed to the typical Friday, because it is the July 4 holiday here in the States. What should our listeners watch out for? What are the scenarios how the market might react?
You know, that sort of stuff? Yeah, let's let's let's set the baseline really quick. baseline is for a weaker number versus last month 139,000. In May, Bloomberg consensus is around 110.
The unemployment rate, which we know, which we think we've covered over the course of the last couple weeks, I think is also understated. I mean, the if it wasn't for the big drop off in the household survey of you would have gotten a 4.5 4.6 unemployment rate. And it was 4.24 last month, very close to being 4.3.
So right now the expectation is for a 4.3 for the June number. If you get anything above 4.3, I think that's going to be noteworthy. So those are the baselines.
I think, look, you know, the the mood is definitely a concern around will this be a negative print? I mean, I'm not sure we get enough to create a negative print, just like we saw with the ADP. But that would really be, I think, a watershed moment that would really kind of inflict the market but critically, Fed Fed, the Fed to start to really think we have a bigger problem at hand, even though every single month we get revisions in out of roughly 35 to 50,000 per month, which tells you that NFP has been overstated as well.
So it's going to be a tricky one. I think if it's anything above 4.4 on the unemployment rate, that's going to matter more than the actual headline. So even if the headline were to come in better than 110, I think the market won't completely react to that unless it's closer to 200,000 or more, then the market would say it's a really strong number.
But if it's somewhere around 104.3, I think we're probably priced in for that. And maybe beyond that, we're probably priced in for a sub 100,000, probably upside risks to unemployment rate. If we were to get a negative number, I do think on the headline, I do think that really shifts the odds on the Fed in a meaningful way, maybe getting us closer to 5050 on a July cut.
And remind me, what's the Fed? What's the Fed's expectation for the unemployment rate for this year? Yeah, so the Fed in his most recent June, scp forecast updates, they shifted it up to 4.5 from 4.4.
So they're giving themselves a little bit of headroom. But if we get to 4.4 4.5, we're basically we're basically there at the middle of the year, way way ahead of schedule of what they were anticipating. And it doesn't stop there.
It typically once it starts trending, it keeps going higher. I mean, like most likely, we're going to get to 5% on the unemployment rate at the end of this year, early part of next year, unless we have a real seismic shift on the way that that companies are thinking about hiring. And if you look at all the layoff announcements and things that we're hearing, it's just gonna be hard to see how companies at the middle of the year are going to start to really hire in mass, while at the same time, the government is still doing job reductions.
And a lot of the sort of job reductions that happen are going to come out of their severances in September, August, September, it's really hard to see how this is going to really turn around in a way that would lower the unemployment rate from here. So there's more upside risk, and it's going to hit before the Fed's target. For sure.
I've definitely heard you say in client meetings that the unemployment rate is the most nonlinear data set out there. And this, you know, so I can certainly see it starting to go and then going. You know, just as an aside, I note that the whisper number is, is 98,000 versus the you know, currently 98,000.
Obviously, that'll move but versus the consensus of 110,000 that you mentioned. So to your point, the markets, you know, market appears to be priced for something a little bit on the soft side. But let's so so thank you for that very comprehensive preview of the of the June employment report.
But you know, I also think we would be remiss without kind of like, you know, touching on the more macro view, you put out a great piece, it was in your latest macro to markets outlook called a stitch in time saves nine, which, you know, maybe some of our older, older listeners would might be familiar with that phrase. So you know, the the subtitle was kind of interesting, says in some uncertainty may be fading, but the consumer is tapped out, can the Fed cut in time, I suspect that that's sort of the punchline of the piece. But why don't you why don't you go over the high points for for the benefit of our listeners?
Yeah, and that piece, actually, in our our view, in general, really hinges on this NFP. And I usually don't like to kind of, you know, hook or latch on to just one data point as being super critical. But you know, we are very out of consensus.
I think we're the only house, maybe there may be someone else out there that I'm not aware of, but that that still is holding on to the July cut. And it's and it's, and it's, it's in the spirit of that subtitle, which is, although, you know, we're seeing a lot of a lot of wins on the on the on the administration side, there's, well, at some point, we're gonna get this, hopefully this bill passed the big, beautiful bill. There's been peace negotiations after some pretty intense conflicts down in the Middle East.
You know, there's, there's things going on on the trade front. I mean, hopefully, a number of trade deals are going to get released over the coming weeks. So those are all good, you know, outcomes, good wins.
And that lifts some of the uncertainty that's been kind of hanging over the markets and the economy. But at the same time, it's kind of it's run up against a consumer that's largely gotten tapped out. There, you know, you're seeing it in delinquencies on credit cards, autos, now you start to see a small uptick in mortgages.
But just in general, the there's just, you know, there's less disposable income out there amongst the consumers. And they're still worried about potential higher prices that may come through if tariffs do come into effect regardless. And so you have a very defensive consumer, worried about their jobs, job market getting softer.
It's like at this weird inflection point that this is when the Fed supposed to put in insurance cuts to avoid a downturn, to at least try to catch it and not wait for it. Because if they wait, then they're gonna have to cut even more. So that's, that's been my view in a nutshell.
And so I think that, you know, can they cut in time? I think if the if the jobs data is soft enough, and we get a weak enough inflation print, again, this this month, and the Fed starts pivoting, I know that the clock is is running out and has to perfectly line up for a July cut, but I don't think it's impossible. So I'm going to stick with it until we see what NFP brings us.
But, you know, if we if we're, you know, if we're a little bit too ahead of ourselves, I think all this would mean that if they were not to cut in July, that it just increases the odds of September, just basically being a shoe in nothing ever is guaranteed in life. But I would think that September, almost like a deja vu of last year, you're going to get a repeat of the Fed cutting in September, then where the main question then really becomes, is it 25 or 50? Because they made the same mistake, I think last year, they should have cut 25 last July, they didn't, they waited, they did 50.
And if the jobs data keeps getting progressively worse over the summer, as we think it will, this is just the start of it, if we get it tomorrow, then they're going to look up in September, say, yep, we're behind the curve. Again, they're going to have to do 50. But we'll cross that bridge when we get there.
Well, well said. History doesn't repeat itself, but it often rhymes, I've heard people say. So that was that was great, George.
You know, in case anyone's interested in a little bit more, though, I would definitely encourage our listeners to check out George's latest macro to markets outlook entitled, again, a stitch in time saves nine. He's also going to put out an employment report preview that should be on your on your emails or on the website, you know, by the time you're listening to this episode. And if you are still not receiving George and his team's strategy reports, do check out the MEFG research portal at www.mefgresearch.com, where you can find all of your favorite MEFG research as well as sign up to have it conveniently delivered to your inbox.
Great stuff, as always. Thanks, George. Thank you, John.
And thank you for listening to the Global Markets Podcast. Rate, review and subscribe on Apple, Spotify or wherever you get your podcasts and reach out to your MEFG sales rep for any further information. Check back soon for more insights from the Global Markets Research team.