CICC comments on the U.S. March non-farm payrolls: The hidden risks are more in "inflation" rather than "stagnation"

According to the Zhitong Finance APP, CICC released a commentary on the U.S. non-farm payrolls for March. The team believes that the improvement in employment data this month is mainly due to a significant boost in the service industries such as leisure hotels and retail, while the goods and manufacturing sectors generally declined. This non-farm report indicates that the U.S. economy is not in bad shape, at least not facing the recession pressures that the market is worried about; the greater hidden danger is the "quasi-stagflation" situation caused by tariffs.

The following is a summary:

In March, non-farm payrolls increased by 228,000, significantly better than the expected 140,000 and last month's revised figure of 151,000 (down to 117,000). Although the unemployment rate rose to 4.2%, exceeding expectations and last month's 4.1%, the labor participation rate also increased from 62.4% to 62.5%. Additionally, wage growth remained relatively moderate, unchanged at 0.3% month-on-month and dropping to 3.8% year-on-year, clearly better than the expected 4%.

The improvement in employment data this month is mainly attributed to a significant rise in service industries such as leisure hotels and retail, while the goods and manufacturing sectors generally declined. Federal government employment continued to decrease by 4,000 (reflecting layoffs), but state and local government employment increased by 23,000, resulting in a slight overall increase in government sector employment. However, the Challenger government layoff index surged to more than three times that of February, and whether this will be reflected in next month's non-farm data remains to be seen.

This non-farm report raises several issues: 1) The U.S. economy is not in bad shape, at least not facing the recession pressures that the market is worried about; 2) Gradual slowdown is still a major trend, as indicated by the rising unemployment rate and the drag from government layoffs; recently, the U.S. ISM manufacturing and services PMIs have also weakened;

1. The greater hidden danger is the "quasi-stagflation" situation caused by tariffs. A slowdown in growth or even a recession is not frightening; the Federal Reserve can resolve most issues with rapid interest rate cuts, similar to the situation triggered by the "Sam Rule" from July to September last year. However, if the Federal Reserve cannot cut interest rates due to inflationary pressures on the supply side (from the pandemic in 2022 and current tariffs) and can only "watch helplessly" as growth slows, it will not only block the transmission path of offsetting growth pressures through rate cuts but also increase market concerns about recession or even stagflation, which is the main issue caused by tariffs (as analyzed in "The Exceedingly Unexpected 'Reciprocal Tariffs'"). Currently, the June rate cut expectations priced in by CME interest rate futures are almost 100% (with a 61% chance of a 25bp cut), but inflation caused by tariffs may constrain the Federal Reserve's actions. As analyzed in "The Exceedingly Unexpected 'Reciprocal Tariffs'", in the short term, in addition to focusing on tariff developments and countermeasures, due to the significant volatility of various assets, attention should also be paid to potential liquidity shocks