Huachuang Securities: Stable Non-Farm Payrolls in March, Difficult to Alleviate Market Concerns

According to the Zhitong Finance APP, Huachuang Securities released a research report stating that the robust non-farm payrolls and low CPI report can alleviate concerns about stagflation in the U.S. from a hard data perspective. However, the significant uncertainty surrounding tariff policies will continue to suppress risk appetite. Therefore, the subsequent recovery of risk appetite for U.S. dollar assets at the macro level depends on three factors: first, the basic implementation of tariff policies; second, the positive stimulus from tax reduction policies; and third, whether the secondary inflation risk triggered by tariffs can be preliminarily falsified.

Key points are as follows:

March Non-Farm Data: New Jobs Significantly Exceed Expectations

1. New non-farm employment significantly exceeded expectations, recording 228,000 jobs, compared to an expectation of 140,000; data from the previous two months was revised down, but the average employment growth in the first quarter remains at 152,000. Based on the current labor participation rate and population growth, 150,000 per month is roughly the balance level to keep the unemployment rate relatively stable. Overall, non-farm employment growth remains robust. From a sector perspective, the largest increases in employment were seen in education and healthcare, leisure and hospitality, retail, and transportation and warehousing, followed by other services, government sectors, and construction.

In addition to "the economy remains solid" (Powell's latest statement), the better-than-expected non-farm employment this month may also be related to three temporary or disruptive factors: first, it may be related to the easing of disruptions from previous severe weather. This month, the number of people who transitioned from full-time to part-time work due to severe weather and the number of people who were unable to work due to severe weather have significantly decreased compared to January and February, with the decline exceeding the average level of the past five years. Second, approximately 15,000 strikes in the healthcare and retail sectors have ended. Third, the impact of government layoffs has not yet been significantly reflected, as government employees on paid leave and those receiving severance pay are still included in government employment statistics. According to data from Challenger, the federal government announced plans to cut about 216,200 jobs in March, while the non-farm report shows that federal government employment only decreased by 4,000 in March.

1. The unemployment rate rose slightly from 4.139% to 4.152%, remaining stable overall, rounded to 4.2%, with Bloomberg expecting 4.1%. The increase in the unemployment rate was driven by the number of new entrants to the labor market and corporate layoffs (permanent unemployment), contributing approximately 0.04 and 0.03 percentage points, respectively. The decrease in the number of people ending temporary jobs, resignations, and re-entering the labor market contributed to a decrease in the unemployment rate of approximately 0.04, 0.03, and 0.02 percentage points, respectively.

2. Hourly wages increased in line with expectations, with a month-on-month increase of 0.3%, matching expectations, while the previous value was revised down from 0.3% to 0.2%. Theoretically, in a context of slow declining inflation, resilient wage growth that continues to exceed inflation is beneficial for improving residents' real income and consumption capacity. However, consumers may attribute wage growth more to their own efforts while blaming price increases on the government, which could be an important psychological factor behind consumer dissatisfaction with inflation.

Robust Non-Farm Data Fails to Alleviate Market Concerns

The robust non-farm report did not soothe market concerns. On one hand, the uncertainty surrounding the subsequent tariffs exceeds expectations, such as the "1/2 equivalence" in tariffs that still has room for change, and tariffs on specific goods like semiconductors, pharmaceuticals, and critical minerals have yet to be implemented, along with the responses and negotiation situations of various trading partners. On the other hand, Powell's latest statement did not signal a "Fed put option" for market volatility, still believing that the Fed is in a favorable position, choosing to continue observing to wait for the clarity of the effects of Trump's various policies After the release of the relatively stable non-farm payroll report, market expectations for interest rate cuts further intensified, with the futures market pricing in an increase in the number of rate cuts for the year from 3.8 to 4 times, and the year-end policy rate expectation dropping from 3.37% to 3.307%.

In terms of asset performance, the combination of a sharp decline in U.S. stocks and commodity prices, along with a rise in the U.S. dollar index and long-term U.S. Treasury yields, is very similar to the liquidity shock experienced in mid-March 2020. As the market significantly corrected, the potential risks of liquidity shocks spontaneously unfolding in the financial market further amplified the negative risk preference impact of tariff policies in the short term. The Dow Jones Industrial Average fell by 5.5%, the Nasdaq index dropped by 5.82% (down over 20% from its peak, entering a technical bear market), the S&P 500 index declined by 5.97%, Comex copper fell by 9.12%, and WTI crude oil dropped by 6.92% (affected by OPEC+ exceeding expectations for growth). The U.S. dollar index rebounded nearly 1% from its low, ultimately closing up 0.89%, while the yield on the 10-year U.S. Treasury rose nearly 12 basis points from its low, closing at 4%.

We previously pointed out that a robust non-farm payroll report combined with a low CPI expectation could alleviate concerns about stagflation in the U.S. on a hard data level, but the significant uncertainty surrounding tariff policies will continue to suppress risk appetite. Therefore, the subsequent recovery of risk appetite for U.S. dollar assets at the macro level depends on three factors: first, the basic implementation of tariff policies; second, the positive stimulus from tax reduction policies; and third, whether the secondary inflation risk triggered by tariffs can be initially falsified. Currently, these three clues remain unclear, indicating that the adjustment of risk assets may not be over. During this process, it is essential to be vigilant about the possibility of liquidity shocks. Moreover, the longer and more significant the adjustment cycle, the greater the likelihood that the "collapse" of asset prices will reverse the wealth effect for households and disrupt the virtuous cycle of the U.S. economy, leading to an endogenous risk spiral.

Risk warning: Uncertainty of Trump's policies; U.S. inflation exceeding expectations