July Non-Farm: A "Disruptive" Moment?

Last night's non-farm payrolls may become a turning point for the U.S. economy and market **. In previous reports, we have questioned the appearance of the U.S. economy being "immune" to tariffs. However, since July, a series of impressive data released in the U.S. has led to continuous new highs in the U.S. stock market, a significant rebound in the dollar, breaking through 100 at the end of July. The single-month non-farm data released last night, especially the shocking downward revision of data, has "disruptive" implications that we believe can be viewed from at least three levels:

First, we need to reassess the "externally strong but internally weak" nature of the U.S. economy. We have mentioned in previous reports that the internal demand and manufacturing pressures in the U.S. in the second half of the year are considerable, which means that the asset logic previously established under the shiny exterior of the U.S. needs to be reevaluated; second, the White House has officially begun to "hunt" the Federal Reserve. After the data was released, Trump immediately fired the Labor Statistics Bureau director appointed by the Biden administration and accepted the resignation of Federal Reserve Governor Quarles, whose term ends in January next year. This means that the White House is determined to influence the September interest rate meeting, and the vacancy of this governor position allows Trump to arrange a "shadow chairman" candidate to enter the FOMC as early as August, whereas the next vacancy was originally expected to occur in January next year. Third, we may need to reassess the U.S. statistical data system, once touted as the most complete and transparent in the world, which has become increasingly mired in political disputes. This is a crisis of trust and also the most important source of asset price volatility. Remember the lessons from early August last year and be wary of the possible "blood rain and wind" in the global market next week.

Shocking non-farm payrolls: below expectations + bottomless downward revisions. In July, not only did the single-month non-farm payrolls plummet to 73,000, significantly below the expected 104,000, but even more concerning is that the job additions for May and June were revised down by a total of 258,000 (equivalent to nearly zero job additions over two months, and of course, we cannot rule out the possibility of further downward revisions in July). After the data was released, market concerns about economic downturn reached an extreme, the dollar immediately plummeted, almost erasing half of its gains since the end of July, U.S. stocks fell sharply, and the probability of a rate cut in September soared to over 70% from a previous expectation of no cut, with the 10-year U.S. Treasury yield falling to around 4.2%.

From the structural breakdown, the contribution to new non-farm payrolls almost entirely came from healthcare, with the range of employment increases becoming increasingly narrow. Among them, manufacturing and federal government remain "on thin ice," with the former shrinking for three consecutive months under the impact of tariffs, while the latter fell again this month after a brief recovery in June, with the pain of layoffs becoming more evident; the service sector remains the main support, but structurally, it is not optimistic. In recent months, apart from healthcare and social assistance, other industries have made negligible contributions to non-farm payrolls, and this imbalanced employment structure makes us skeptical about the sustainability of U.S. economic growth Moreover, the productivity of healthcare and social assistance is relatively low, with a correspondingly high resource utilization rate, indicating a certain degree of "stagflation" tendency.

Although Powell has consistently emphasized that the downward part of new employment comes from a slowdown on the supply side, placing more importance on indicators such as unemployment rate and wages (which, based on July data, have not shown obvious risks), the market seems unconvinced. The slowdown on the supply side also seems difficult to fully explain such a large-scale downward revision of employment, and the market's hard-earned expectations for economic improvement have weakened again. We tend to believe that the hidden dangers behind the labor market may have become increasingly apparent.

From a macro narrative perspective, the biggest difference in July is that tariffs do not seem to have overturned the American exceptionalism, but rather have pulled the market back from the side of "questioning" on the balance. Trump successfully raised the reciprocal tariffs from the 10% during the deferral period, while other countries did not exhibit similar "resistance" as in April, but instead actively sought consensus.

From the perspective of short-term stimulus factors, resilient economic data + a firm Powell = a hawkish Federal Reserve. The seemingly impressive second-quarter GDP data and unexpectedly rising core PCE growth rate have given the market an intuitive feeling: the inflation effect brought by tariffs is becoming increasingly evident, but the economy still shows strong resilience, including a rebound in confidence among American residents and businesses, and continued expansion in the service sector, with dollar bulls reluctant to "leave the table." However, from a sub-item perspective, consumption growth in H1 2025 has already begun to decline compared to 2024, and investment has significantly weakened due to tariffs and persistently high interest rates. The peak of "cheap debt" maturities leading to rising costs from debt replacement will continue to drag down capital expenditure growth (which may even include AI, the "only hope of the whole village") during the upcoming debt downturn cycle (approximately two and a half years), as we have elaborated multiple times in previous reports. (See reports "How Much Longer Will the Dollar Weaken?", "How is the Liquidity of American Companies?", "Written at the Time of the Triple Kill of Stocks, Bonds, and Currencies")

At the July interest rate meeting, Powell's hawkish remarks also poured cold water on interest rate cuts, affirming the current robust performance of the labor market while continuing to emphasize the potential impact of tariffs, cautioning against the risk of a one-time price shock from tariffs turning into persistent inflation risk; On the other hand, under the continuous political pressure from Trump, Powell has not shown any signs of retreat or submission that the market expected, but instead has firmly maintained a data-driven approach and the independence of the Federal Reserve, which has significantly adjusted the market's expectations for interest rate cuts.

However, asset prices are always influenced by multiple factors, intertwined between long-term and short-term, entangled with emotions and facts. But ultimately, expectations will return to reality, and the July non-farm payrolls may have taken the first step. For the US dollar, we still maintain our previous view that the dollar remains in a weak cycle, and July was merely a corrective rebound.

In the long term, it is the inertia of the debt cycle and the dilemma of choices. The dollar currently faces the curse of high US government debt: whether it is the ever-growing scale of US Treasury bonds or the economic pain brought about by active debt management, the dollar cannot escape the fate of depreciation.

In the medium term, it is the marginal differences in economic prosperity. After the pandemic, the US economy has continued to expand under monetary easing and active fiscal policies, but it now seems to have reached the "last gasp." Meanwhile, the Eurozone, especially the German economy, although it will be under pressure in the short term due to the euro exchange rate and tariffs, the shift in fiscal policy and the gradual easing of the Russia-Ukraine situation are more important structural factors. Japan is also inclined to tighten monetary policy due to high inflation.

From the perspective of capital flows, an important factor is the future narrowing of interest rate spreads. Compared to the rapid decline of the US dollar index since the beginning of the year, the decline in the interest rate spread between the US and Germany/Japan has not been significant, and there has even been a certain stabilization recently, which supports dollar liquidity and provides some support for a short-term rebound of the dollar. However, the actual interest rates in the US may further decline in the future: as economic pressures gradually emerge and the White House continues to exert pressure, the probability of the Federal Reserve cutting interest rates within the year is high, which may lead to a further decline in nominal interest rates + rising inflation (easing + tariffs). In contrast, US tariffs exert tightening pressure overseas, which will lead to a further narrowing of the actual interest rate spreads between the US and developed countries like Europe and Japan.

Authors of this article: Shao Xiang, Wu Shuo, Lin Yan, Source: Chuan Yue Global Macro, Original title: "July Non-Farm: A 'Disruptive' Moment? (Minsheng Macro Shao Xiang, Lin Yan)"

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