Is the market "scaring itself"? With severe K-shaped economic divergence, what justifies the Federal Reserve's rate hikes?

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An unexpectedly high non-farm payroll report has pushed market concerns about a Fed rate hike to new highs—yet this liquidity tightening panic is likely more a case of “scaring itself” by the markets.

On the evening of June 5th Beijing time, the US Department of Labor announced a May increase of 172,000 new non-farm jobs, far exceeding the market expectation of 85,000. After the data release, CME FedWatch showed that the derivatives market has fully priced in a Fed rate hike beginning in December this year. Liquidity-sensitive assets immediately suffered a steep drop: the yield on 10-year US Treasury bonds rose 8.1 basis points in one day to 4.55%, the Nasdaq index fell 4.2%, and spot gold in London dropped 3.25%.

In a report on the 9th, Caitong Securities analyst Zhang Wei believes this unexpected growth in non-farm data has obvious structural peculiarities and is difficult to regard as a signal of comprehensive economic overheating. Meanwhile, the US’ K-shaped economic divergence remains severe, and inflation expectations in the real sector have not shown signs of unanchoring—none meet the prerequisites for triggering a rate hike. Caitong Securities believes the Fed’s new chairman Waller’s top priority is to maintain nominal rate stability; before advancing broader monetary discipline reconstruction, he must play the role of a "roly-poly" in the short-term.

It is worth noting that before the Fed interest rate meeting results are announced in the early morning of June 18 Beijing time, the market’s liquidity concerns will not dissipate quickly. High volatility may persist, with risks of further adjustment. But from a medium-term perspective, neither the liquidity environment nor the AI industry trend have materially deteriorated; the tech bull market is not over yet.

Illusion Shattered: The “World Cup Effect” Behind the 172,000 Non-Farm Jobs

May’s increase of 172,000 non-farm jobs looks striking, but structural analysis reveals obvious short-term disturbances. Caitong Securities notes this job growth is highly concentrated in the leisure & hospitality sector (up 70,000) and local government (up 55,000), together accounting for the vast majority of the increase.

The sharp jump in leisure & hospitality jobs is closely related to the upcoming World Cup. The US, Canada, and Mexico co-hosted World Cup will open in the US on June 11, with participating teams expanding from 32 to 48, and matches from 84 to 104; the US will host 78 matches across 11 cities, including quarterfinals, semifinals, and the final. The approach of a large-scale tournament inevitably leads to a short-term surge in temporary hiring in supporting services such as food and hotels.

Caitong Securities believes this increase lacks sustainability; a preliminary employment trend judgment can only be made after the World Cup ends. Interpreting this data as a comprehensive strengthening of the labor market, thus deducing the necessity of a rate hike, does not stand up to scrutiny.

Fragile K-shaped Economy: The Real Sector Cannot Bear a Rate Hike

Even leaving aside the special characteristics of the non-farm data, the broader US economy is not yet at a stage where a rate hike is needed to curb overheating. Caitong Securities data shows the US economy’s K-shaped divergence remains severe—overall data is acceptable, but structural pressures are accumulating.

On the credit side, Q1 credit card delinquency rates remain at 2.95%, and severe delinquency conversion rates reach 7.12%—both at highs since the pandemic. In real estate, April annualized new home sales were 622,000 units and existing home sales were 4.02 million units, both below pre-pandemic levels, and since the Fed started rate cuts in September 2024, there has been no effective rebound.

There is also obvious divergence in durable goods consumption. Driven by the AI industry trend, electronics/appliances’ year-on-year sales growth rebounded from 3.1% last November to 7.6% this April; but car sales, home appliances, and home decor sales growth slowed or even turned negative, down 1.4% and 3.6% year-on-year in April respectively.

This "financial loose money, real economy tight money" pattern is at the heart of the K-shaped divergence. The Fed’s six rate cuts since September 2024 have failed to effectively reduce real sector financing costs, and the spillover effects of the AI boom have not yet transmitted to traditional rate-sensitive sectors. Thus, the current US economy is structurally fragile, not uniformly overheated.

Inflation Expectations Anchored, No Trigger for Rate Hike

From an inflation perspective, the Fed also lacks grounds for a rate hike. The Fed’s core assessment framework anchors two dimensions: whether inflation shows a sustained upward trend, and whether long-term inflation expectations face unanchoring risk. Currently, neither condition is met.

Wage-inflation spiral has not formed: US private sector hourly wage growth, year-on-year, fell from 3.7% in December 2025 to 3.6% in April and 3.4% in May this year.Real purchasing power turns negative: Due to the US-Iran war driving up oil prices, US CPI rose 3.8% year-on-year in April (1.1 percentage points higher than December 2025). Subtracting CPI from wage growth, US residents’ real purchasing power turned negative in April (down 0.2% year-on-year, a steep drop of 1.2 percentage points from December 2025).Inflation expectations firmly anchored: New York Fed’s May survey shows median consumer inflation expectations at 3.46% for one year, 3.13% for three years (even slightly below last year’s April tariff friction period), and 3.02% for five years. The real sector shows no signs of panic-buying or malignant inflation precursors.

The True Task of the Fed: Stabilize Rates, Not Tighten Policy

To sum up, the Fed’s most important current task is neither to suppress overheated demand nor combat inflation, but to maintain relative nominal rate stability.

On one hand, the K-shaped divergence extends to capital markets—tech stocks’ valuations are highly sensitive to rates, and traditional sectors’ credit and consumption activities are similarly affected. The more fragile the structure, the greater the reliance on a stable rate environment. On the other hand, even if the Fed does raise rates, tightening would only hit rate-sensitive K-shaped lower segments (consumption, real estate, traditional industries), not suppress AI industry expansion—this would, in effect, make the already fragile economic lower segment pay for AI prosperity, further exacerbating structural imbalance. If the AI trend itself weakens and spillover effects do not materialize, the K-shaped economy will converge downward from the top, and rate hike necessity will disappear entirely.

Caitong Securities therefore believes that before achieving the long-term vision of rebuilding fiscal-monetary discipline and restoring dollar credibility, Waller’s short-term task is to stabilize the situation. Even, if the capital markets keep irrationally driving up nominal US bond yields, the Fed may instead need to release dovish signals or even cut rates to correct market deviations.

Hence, current market expectations of Fed hikes are largely due to “scaring itself,” and liquidity will not undergo a substantive tightening. Until the interest rate meeting results on June 18 are released, liquidity concerns may continue to suppress market sentiment, with short-term volatility and adjustment risks still demanding attention. But in the longer run, neither liquidity environment nor AI industry trend have fundamentally changed, and the foundations for the tech bull market remain solid.

Risk Disclosure and DisclaimerThe market carries risks, and investment requires caution. This article does not constitute personal investment advice, nor does it take into account the special investment objectives, financial situation, or needs of individual users. Users should consider whether any opinion, viewpoint, or conclusion in this article suits their specific situation. Investment decisions made based on this are at your own risk. ```