As US markets enter a shortened trading week ahead of the July 4 holiday, investors are bracing for a critical batch of economic data, renewed trade negotiations under the Trump administration, and early signals ahead of the second quarter earnings season.
The main event this week being watched by investors is the release of June’s Nonfarm Payrolls (NFP) report, which is widely viewed as a potential turning point for the Federal Reserve’s rate path.
Moved up a day due to the Independence Day holiday, the June jobs data is expected to show a cooling labor market, with consensus estimates calling for job gains around 100,000 to 110,000.
“The main focus for market participants will undoubtedly be the June employment report,” Deutsche Bank analysts wrote in a note. “We expect payroll gains to slow somewhat relative to their recent averages.”
Deutsche Bank economists pointed to weaker initial jobless claims and seasonal hiring trends as the basis for their forecast. “Private sector hiring tends to drop off in the summer,” they wrote. “Last year, the June to August period saw hiring more than 65% below its January to May pace.”
Unemployment is forecast to tick up to 4.3%, while wage growth is expected to hold firm at 3.9% year-over-year.
The Federal Reserve remains in a data-dependent stance, and softer jobs data could tilt the scales toward a rate cut sooner than September.
“Even modest payroll gains could tighten the labor market given demographic shifts,” analysts noted.
With some Fed officials, including Governors Bowman and Waller, signaling openness to a July cut, a weak jobs report may accelerate policy easing.
However, Chair Jerome Powell has so far echoed a more cautious tone. He is scheduled to speak on Tuesday and may reiterate that inflation, especially tariff-related, remains a concern.
Risks linger despite rally
Despite softening economic indicators, US equities are near record highs. The S&P 500 is up 10% in Q2, the Nasdaq 17%, and even the broader Russell 3000 has gained 10% this quarter. Importantly, this rally has been more inclusive than the tech-led surge of 2024.
“This rally is no longer just about Nvidia or Big Tech,” said Kathleen Brooks, research director at XTB. “The equal-weighted S&P 500, Russell 2000, and sectors like construction and entertainment have all outperformed recently.”
Crypto stocks are also playing a role. Coinbase is the top performer on the S&P 500 this quarter, rising over 100% amid a surge in Bitcoin prices. “The breadth of this rally suggests there’s more underlying strength, though bubbles remain a concern,” Brooks added.
Still, investors will soon turn their attention to earnings. The Q2 season begins in mid-July, and S&P 500 earnings are expected to grow just 5% year-over-year, the slowest since late 2023.
Notably, 11% of companies have issued negative guidance, raising the question of whether the bar has been set low enough to allow for upside surprises.
“If companies beat expectations, even slightly, it could keep the momentum going into Q3,” Brooks wrote.
Eyes on Washington
Turning to Capitol Hill, President Trump’s sweeping tax-and-spending legislation, the “One Big Beautiful Bill Act,” cleared a key Senate vote over the weekend. The bill could add $3.3 trillion to the US deficit over the next decade.
“The budget, despite its size, isn’t rattling equities, but it is weighing on the dollar,” Brooks wrote. “Fiscal expansion without clear growth payoffs is making investors nervous about US debt sustainability.”
Indeed, the dollar index is down sharply in 2025, logging its worst H1 performance since 2005. It continues to weaken against G10 currencies and many emerging market peers.
Treasury yields are back on the rise, as bond investors reassess the implications of a ballooning deficit and rate policy uncertainty.
Meanwhile, trade negotiations are showing progress. Canada dropped its 3% digital tax on US tech giants, while Japan and the US are reportedly close to a deal. But talks with the European Union remain unresolved, a lingering risk as tariff deadlines approach.
“The prospect of quick trade agreements with key partners is acting as a powerful tailwind for equities,” Brooks wrote. “But the threat of renewed tariff tensions, especially with the EU, could derail sentiment quickly.”
Cautious optimism meets summer volatility
With volume thinning ahead of the holiday and volatility likely to pick up, this week’s events could mark a turning point for markets. A disappointing payrolls number may revive rate cut hopes and support equities, while a strong print could spark concern that the Fed will hold rates higher for longer.
“The Fed remains in wait-and-see mode amidst continued elevated uncertainty around trade, fiscal, and immigration policy,” Deutsche Bank wrote. “This week’s labor market data will provide additional insight, but it won’t settle the debate.”
One thing is certain, even in a shortened week, investors won’t be taking their eyes off the ball.
Key events this week:
- Monday: Chicago PMI, 3-month and 6-month Treasury bill auctions, Fed’s Raphael Bostic speaks
- Tuesday: ISM Manufacturing Index, Job Openings and Labor Turnover Survey (JOLTS), Fed Chair Powell speech
- Wednesday: ISM Services Index, ADP Employment Report, weekly jobless claims
- Thursday: June Nonfarm Payrolls, unemployment data, markets close early at 1pm
- Friday: Markets closed for Independence Day