Don't just focus on AI trading! This Friday's nonfarm payrolls might "explode."

The AI boom in US stocks is still heating up, while the bond market has already turned. Ahead of Friday’s US May non-farm payroll report, the market is showing a marked divergence: on one side, US stocks continue to soar driven by AI capital expenditures; on the other, bond short sellers are ramping up bets on inflation and rising rates.

Despite Bank of America’s forecastthat the US job market remains robust, it is not strong enough to force the Fed to raise rates—the bank expects May non-farm payrolls to add 95,000 jobs (higher than market consensus), with the unemployment rate at 4.3%. These figures are enough to justify the Fed keeping rates steady, with a clear distance from a rate hike unless unemployment falls further to around 4.0%.

However, bond market traders are clearly more cautious. According to Bloomberg, even though the 10-year US Treasury yield has retreated from a two-week high near 4.69% to below 4.5%, short positions in Treasuries remain crowded, and bets on a rate hike later this year are still accumulating.

Meanwhile, the AI investment boom is still sweeping the stock market. Boosted by large-scale fundraising in the tech sector, US stocks have gained for nine consecutive trading days as of Tuesday’s close, with the S&P 500 breaking above 7,600 points. According to a previous Wallstreetcn article, Goldman Sachs trading desk data show AI-related assets have again become the market’s main theme: AI-themed long/short pair portfolios surged 650 basis points in a single day, the data center sector rose 470 basis points, and AI semiconductors gained 320 basis points.

This stock-bond divergence reflects the core contradiction in the market: the AI infrastructure investment wave is continuously boosting corporate earnings and risk appetite, while job resilience and potential inflationary pressure are making bond investors highly wary of the rate outlook. Optimism vs. defensiveness, growth vs. inflation—two narratives are playing out in the same market.

BofA forecast: Robust jobs, but not enough for rate hikes

Bank of America economist Shruti Mishra projected in a report published June 2 that May non-farm payrolls will increase by 95,000 (including 100,000 in the private sector), above market consensus and well above the “break-even” threshold of about 20,000.

By sector, education and healthcare are expected to continue leading job growth. These sectors have lower AI penetration rates, and demographic trends also provide continued support. In addition, the manufacturing PMI has been expanding for five straight months, likely driving a rebound in trade and transportation jobs. Leisure & hospitality and construction are expected to see their third consecutive month of growth, with construction further benefiting from steady demand for data center construction.

Upside risks cannot be ignored—job data could still outperform expectations. Despite increased white-collar layoffs, initial jobless claims in May remained low, and the overall labor market has not clearly weakened. ADP weekly figures have recovered notably since late March. Also, early hiring for the World Cup may provide an extra boost to leisure and hospitality.

On wages, Bank of America expects average hourly earnings to rise 0.3% month-on-month, with average weekly hours unchanged at 34.3. The bank believes the current level of income growth is enough to support consumption, but has not yet created significant inflationary pressure.

Bond market shorts stand firm, rate hike expectations remain priced in

Even though Bank of America remains cautious on rate hikes, the bond market’s actual moves are more aggressive. According to Bloomberg, BofA strategists noted in a recent weekly report that “positions remain tilted short”—even if the momentum is not as strong as before, this pattern will sustain a bias toward rising rates.

On the options market, traders hedged for both upside and downside scenarios in the past week. Notable trades include: a $16 million options bet that the 10-year yield will retreat to 4.4% by the end of June; another trade betting the 10-year yield will break above 5% in the coming months—a level not seen since a brief touch in October 2023.

In the SOFR options market, the 96.50 strike price remains the most concentrated in the June, September, and December contracts, with recent inflows continuing to add call spread positions. The put premium for 30-year Treasury options is also significantly higher than the call premium and has widened further in the past week, reflecting strong demand for protection against higher long-term rates.

JPMorgan’s Treasury client survey shows that for the week ending June 1, investors shifted slightly from net long to neutral, with long positions down 2 percentage points and short positions basically unchanged.

Non-farm payrolls as the key variable: Two-way risks

Friday’s non-farm payrolls data will be a critical checkpoint for testing current market pricing. According to Bloomberg, if the data surprise to the upside, this will reinforce the logic for existing short positions and push yields even higher; if the data disappoint, shorts could be covered, fuelling a bond market rebound.

Bank of America also warns of downside revision risks: Quarterly Employment and Wage Census (QCEW) data suggest recent strength in non-farm data may be overstated and could be revised downward. Also, the divergence between household and establishment employment data has persisted for months, with household survey showing four consecutive months of decline—contrary to non-farm payrolls. This gap warrants continued monitoring.

BofA maintains its Fed policy outlook: If unemployment is at 4.3% or lower, plus inflationary risks, the Fed will keep rates unchanged in the near term; for a rate hike to happen, unemployment would need to approach 4.0%. The bank expects unemployment to gradually fall to 4.2% by 2027.

AI boom conflicts with bond market alarm: Two narratives collide

The current market is showing rare emotional split: US stocks continue to climb on AI themes, with strong enthusiasm for risk assets; while the bond market, caught between inflationary pressures and resilient jobs, remains dominated by short sentiment.

Bank of America’s report points out education and healthcare lead job growth partly because AI penetration is relatively low—this indirectly confirms that AI’s substitution effect for jobs is already happening in some sectors, though not yet fully reflected in total data.

For investors, Friday’s non-farm payrolls is not just a short-term catalyst for bond market direction, but also a key window to test the question “Can AI prosperity coexist with rate hike pressure?” If job data remain strong, market pricing for Fed hikes may become even firmer, and the pressure faced by high-valuation tech and AI-theme stocks will inevitably come to the fore.

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