U.S. Job Growth Disappoints in May; Fed Rate Cut Expectations Rise

U.S. job growth slows in May; Fed, global central banks signal dovish tilt amid trade tensions and softening economic data.

The U.S. labor market showed signs of weakness in May as private businesses added just 37,000 jobs to their payrolls — the lowest monthly gain since March 2023 and far below market expectations of 115,000. April’s employment figures were also revised downwards by 60,000, further dampening optimism.

Leisure and hospitality, financial activities, and information sectors saw modest job gains, but professional and business services, as well as education and health sectors, suffered significant losses. The disappointing report has intensified speculation that the Federal Reserve may cut interest rates soon to support the economy amid rising trade uncertainties.

U.S. Job Growth Disappoints in May; Fed Rate Cut Expectations Rise

On May 7, 2025, the Federal Reserve’s Board of Governors voted unanimously to maintain the Federal Funds Rate in a target range of 4.25% to 4.50%. While the Committee reiterated its commitment to achieving maximum employment and 2% inflation over the longer run, it noted rising uncertainty in the economic outlook. The Fed highlighted growing risks to both sides of its dual mandate — with upward pressures on both unemployment and inflation.

Economic activity has continued to expand at a solid pace, with a stabilizing unemployment rate and a still-strong labor market. However, inflation remains somewhat elevated. Notably, GDP growth forecasts were revised downward to 1.7% for 2025 (from 2.1%), and core PCE inflation was adjusted upward to 2.5%, partly due to tariff-related pressures. In a move to slow balance sheet reduction, the Fed announced that starting in April it would reduce the monthly redemption cap on Treasury securities from $25B to $5B.

The Fed reaffirmed its readiness to adjust policy if risks materialize, with the next FOMC meeting set for June 17–18, 2025.

Bank of Canada Holds Rates Steady Amid Trade Tariff Risks

Moving north, the Bank of Canada (BoC) maintained its overnight rate at 2.75% for the second consecutive meeting, aligning with market expectations. The BoC highlighted ongoing volatility in U.S. tariffs and unclear trade policies as key risks, noting that tariff uncertainty has elevated inflation expectations and could dampen demand for Canadian exports.

Canada’s Q1 GDP grew 2.2%, slightly exceeding forecasts, but weakness in trade-intensive sectors and a rise in unemployment to 6.9% have tempered optimism. CPI inflation eased to 1.7% in April, partly due to the elimination of the federal carbon tax. However, underlying inflation has edged higher. The BoC emphasized caution amid the crosswinds of slowing growth and inflationary pressures from tariffs, with the next meeting scheduled for July 30, 2025.

Asia-Pacific Market Watch: Australian Trade Surplus Narrows, Chinese Services Sector Expands

Australia’s trade surplus in goods narrowed to A$5.4 billion in April, down from a revised A$6.9 billion in March, missing expectations of A$5.9 billion. Exports fell 2.4% to A$44.1 billion, affected by rising U.S. tariffs, while imports rose by 1.1% to A$38.7 billion. Despite this, the Australian dollar remained strong, buoyed by weakness in the U.S. dollar.

The Reserve Bank of Australia (RBA) cut its cash rate by 25 basis points to 3.85% on May 20, following signs of easing inflation and a soft domestic outlook. Trimmed mean inflation dropped to 2.9% in Q1 — its lowest level since 2021. Despite signs of labor market tightness, the RBA noted weak demand in some sectors and high unit labor costs. It flagged the risk of slower household consumption and sluggish economic momentum. The next meeting is scheduled for July 8, 2025.

Meanwhile, China’s Caixin Services PMI edged up to 51.1 in May from 50.7 in April, signaling moderate expansion in the services sector, supported by faster growth in new business and employment. However, new export orders declined for the first time this year amid tariff pressures, hinting at challenges ahead for China’s external trade. The steady services sector growth may offer some support to crude oil prices in the near term.

Monetary Policy Updates Across Key Economies

• New Zealand: The Reserve Bank of New Zealand cut the Official Cash Rate by 25 basis points to 3.25% on May 28 — its sixth straight cut. Despite rising headline inflation (2.5% in Q1), core inflation is easing and spare capacity remains. Labor market conditions are weak, with unemployment expected to peak at 5.2%. The next meeting is on July 9.
• Japan: On May 1, the Bank of Japan kept its overnight call rate around 0.5% and continued its reduction in JGB purchases. Japan projects inflation around 2% for 2025, but sluggish underlying inflation reflects a slowing economy. Global trade policy uncertainty skews risks to growth and prices to the downside. The next meeting is June 17.
• Eurozone: The ECB plans to announce a seventh straight rate cut on June 5, as inflation continues to ease and services inflation softens. The ECB already lowered its main refinancing rate by 25 basis points to 2.40% in April. Despite moderating wage pressures, geopolitical trade tensions have worsened the outlook for growth and confidence.
• UK: The Bank of England reduced its Bank Rate by 25 basis points to 4.25% on May 8. With inflation falling to 2.6% in March and a softening labor market, the MPC judged that a gradual easing was appropriate. However, it warned that monetary policy must remain restrictive long enough to prevent inflation from reigniting. The next meeting is June 19.
• Switzerland: The Swiss National Bank cut its policy rate by 25 basis points to 0.25% in March, as inflation declined to 0.3% in February. The SNB expects inflation to remain low through 2025–2027 and anticipates modest GDP growth of 1.0–1.5% for 2025.

Market Reactions and What to Watch

• U.S. Dollar Index (DXY): Unemployment claims unexpectedly rose to 240,000 for the week ending May 24, above forecasts of 230,000, suggesting softening labor market conditions amid trade tensions. The rise in claims adds downward pressure on the dollar, with a medium bearish outlook over the next 24 hours.
• Gold: In contrast, the weaker labor market outlook supports gold’s safe-haven appeal, with a weak bullish bias expected in the near term.
• Australian Dollar (AUD): Despite the narrowing trade surplus, overall dollar weakness supports medium bullish momentum for the AUD.
• New Zealand Dollar (NZD): Following the disappointing U.S. employment data, the Kiwi rose sharply, continuing its upward trend as Asian markets opened.
• Japanese Yen (JPY): The yen strengthened as safe-haven demand rose amid ongoing global trade uncertainty, with USD/JPY slipping below 143.
• Euro (EUR): All eyes are on the ECB’s rate decision, as policymakers weigh disinflation progress against deteriorating growth expectations.
• Canadian Dollar (CAD): Despite the BoC’s steady rate stance, Canada faces economic headwinds from tariff volatility. Expectations are that the Ivey PMI to show ongoing contraction, though stronger oil prices and a weak greenback continue to support the Loonie.
• Oil: U.S. crude inventories fell sharply by 4.3 million barrels, but oil prices slipped after Saudi Arabia announced price cuts for Asian buyers and OPEC+ signaled increased output for July. WTI crude traded around $62.70 per barrel after an initial dip.

The ongoing uncertainties surrounding U.S. trade policy and tariffs continue to cloud global economic outlooks, impacting currencies, commodities, and labor markets worldwide. Investors and policymakers remain cautious as markets digest mixed data and await further signals from central banks and trade negotiations.

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