CICC: The U.S. June non-farm payrolls exceeded expectations, and a rate cut is expected to begin in September

According to the Zhitong Finance APP, CICC released a research report stating that the June non-farm payrolls exceeded expectations, indicating that the U.S. labor market remains strong and the economic fundamentals are not bad. After the non-farm data exceeded expectations, the current market anticipates a 93% probability that interest rates will remain unchanged in July, while still expecting rate cuts to begin in September, with two cuts expected within the year. The Federal Reserve's rate cuts and tax reduction plans may restart the U.S. credit cycle in the fourth quarter, and the bank suggests paying attention to the possibility of a slight strengthening of the dollar and U.S. stocks outperforming in the fourth quarter.

CICC's main points are as follows:

This data is better than expected in multiple aspects: In June, non-farm payrolls increased by 147,000, higher than the expected 106,000. The previous value for May was revised from 139,000 to 144,000, and April was revised from 147,000 to 158,000. The unemployment rate is 4.1%, significantly lower than the expected 4.3% and the previous value of 4.2%. The labor participation rate fell to 62.3%, slightly below expectations and the previous value of 62.4%. Hourly wages increased by 0.2% month-on-month, lower than the expected 0.3% and the previous value of 0.4%; year-on-year, it is 3.7%, lower than the expected 3.8% and the previous value of 3.9%.

Employment increased, the unemployment rate decreased, and wages have not yet risen. While calling this data "perfect" might be an exaggeration, it is "close to perfect." This stands in stark contrast to the significantly lower-than-expected ADP employment data released yesterday. As a result, after the data was released, U.S. Treasury yields jumped nearly 10 basis points to 4.36%, the dollar strengthened, and gold prices fell.

The June non-farm payrolls exceeding expectations indicate that the U.S. labor market remains strong, and the economic fundamentals are not bad. However, upon closer inspection, excluding the 66,000 jobs added by government sectors, the private sector actually saw a decrease of 63,000 jobs compared to last month. This indicates that the overall trend is still weakening, but it is not as bad as it seems. It suggests that rate cuts will happen, but not as quickly as the anticipated July timeframe.

Recently, Federal Reserve governors Waller and Bowman both expressed support for a rate cut in July, leading to increased market bets on an earlier rate cut in July. Rate cut expectations have swung from one extreme to another. However, after the non-farm data exceeded expectations, the current market anticipates a 93% probability that interest rates will remain unchanged in July, while still expecting rate cuts to begin in September, with two cuts expected within the year.

The bank previously indicated that when the market expected the Federal Reserve would not be able to cut rates within the year, a reduction in tariffs would actually increase the probability of rate cuts within the year. #What else does the Federal Reserve need to wait for? The core reason is that the Federal Reserve needs to cut rates (the real interest rate of 1.78% is 0.78 percentage points higher than the natural rate of 1.0%). The uncertainty caused by tariffs has made it hesitant to cut rates, but now that this uncertainty is gradually being eliminated, it can proceed with cuts. However, July seems a bit tight, as tariff exemptions will not be in effect until July 9 and August 12, and inflation is expected to see its largest increase of the year in July and August. Therefore, from this perspective, the fourth quarter, particularly September, is more likely.

In this context, the recent rapid decline in long-term U.S. Treasury yields seems a bit overextended. Additionally, if the Inflation Reduction Act passes, there will likely be around $1 trillion in bond issuance supply and demand from July to September, along with a phase of inflationary increase, which could lead to higher interest rates. However, after the peak, there will be reallocation opportunities. U.S. stocks are in a similar position, with expectations relatively high at this level, and there are several "hurdles" to overcome in the third quarter. However, if volatility occurs, both U.S. Treasuries and U.S. stocks will present reallocation opportunities, and the outlook remains optimistic