Galaxy Securities: Can the questionable labor data support a Fed rate cut in September?

According to the Zhitong Finance APP, China Galaxy Securities has released a research report stating that the new non-farm employment is weaker than expected, with the previous value unexpectedly revised down by 258,000, the unemployment rate rising to 4.25%, and hourly wages increasing year-on-year to 3.91%. The quality of labor data is concerning, but the current degree of weakening in the labor market may not support a rate cut in September. The labor market's contribution to consumption remains stable, and there has not yet been significant weakening; the unemployment rate may also struggle to decrease to a level that forces the Federal Reserve to lower interest rates before the September FOMC meeting.

The main points from China Galaxy Securities are as follows:

New non-farm employment is weaker than expected, with the previous value unexpectedly revised down by 258,000, the unemployment rate rising to 4.25%, and hourly wages increasing year-on-year to 3.91%: In terms of the establishment survey, 73,000 new jobs were added in July, weaker than the market expectation of 110,000; June's new employment was significantly revised down from 147,000 to 14,000, and May's new employment was revised down from 144,000 to 19,000, totaling a revision down of 258,000 jobs. The month-on-month growth rate of non-farm hourly wages accelerated to 0.33%, and the year-on-year rate rebounded to 3.91%. In terms of the household survey, the unemployment rate rose to 4.248% (previous value 4.117%), and the labor participation rate fell to 62.2%. The total number of full-time employed households in July 2025 decreased by 440,000 after an increase of 437,000 in June, while part-time employment continued to decrease by 367,000.

The quality of labor data is concerning, but the current degree of weakening in the labor market may not support a rate cut in September: The new non-farm employment in May and June saw a significant downward revision beyond expectations, leading to a three-month average of new employment data entering the theoretical range that stabilizes the upward trend of the unemployment rate (i.e., below about 70,000 jobs/month). Considering the recent second-quarter GDP data, it is undoubtedly true that the actual economic growth momentum in the U.S. has weakened, but in the face of rising inflation starting in the third quarter, the relatively stable unemployment rate and the further increase in tariffs in August still put the Federal Reserve in a dilemma.

Note: (1) Employment and demand are still weakening; (2) The degree of weakening in the labor market remains relatively limited, and with the increase in tariffs in August adding uncertainty to inflation, the employment data before September may not support the Federal Reserve starting a rate cut in September; (3) The quality of labor data has further declined, with increasing doubts and amplified volatility, which is not conducive to the Federal Reserve making a rate cut judgment based solely on labor data. Overall, although the labor market clearly weakened in July, it still warns that there may not be a risk of the first rate cut in September.

Doubts about the data: The BLS's explanation for the downward revision mainly involves seasonal factor adjustments and subsequent questionnaire responses indicating employment decline, but it is not difficult to see that nearly half of the employment revision in June comes from abnormal "state and local government education positions," which are not affected by the business birth and death model and are also minimally influenced by seasonal adjustments. Therefore, it is unclear why government data suddenly revised down employment. While the questionnaire response rate is generally low, it is actually better than the same period last year and cannot explain such a large data fluctuation The quality-reduced labor data may not effectively assist the Federal Reserve's decision-making: Although China Galaxy Securities has previously maintained that non-farm employment is overestimated, the downward revision of 258,000 jobs over two months is also unusual in the history of this data (excluding months with abnormal events and weather). China Galaxy Securities tends to believe that the downward revision of non-farm employment this month, like the previous overestimation, is exaggerated, but the issues reflected in this month's data are not only a further decline in the labor market but also a worsening quality issue with BLS labor data, which is actually detrimental to the Federal Reserve's decision-making based on data. Considering factors such as the stability of total non-farm payrolls under wage recovery, uncertainty in tariffs, and rising inflation in the third quarter, it may still be difficult for the Federal Reserve to smoothly cut interest rates in September.

The contribution of the labor market to consumption remains stable, and there has not yet been a significant weakening; the unemployment rate may also struggle to drop to a level that forces the Federal Reserve to lower interest rates before the September FOMC meeting: The weakening supply of immigrants prevents the unemployment rate from rising rapidly, while the recovery in wages and the stability of nominal total compensation income mean that the labor market continues to contribute to consumption, and the economy is not in such a bad state that requires the Federal Reserve to cut rates immediately. From the data on the number of illegal immigrants encountered at the border and the labor population born outside the U.S., it is evident that the supply of immigrants began to show a weakening trend during Trump's term, and combined with the decline in labor participation rates, both factors help keep the unemployment rate relatively low. Considering that only August's labor data will be available before the September FOMC meeting, China Galaxy Securities believes that the probability of the unemployment rate exceeding 4.4% and forcing the Federal Reserve to cut rates is actually not high. In addition, the nominal wage growth rate in July remains decent, and based on China Galaxy Securities' fitted income indicators, household consumption is unlikely to suddenly stall.

Overall, the U.S. economy is slowing down, but it has not deteriorated to the point of necessitating a rate cut in September. Although China Galaxy Securities agrees with Governor Waller's support for a rate cut, from the perspective of Powell and most officials, extending the observation period seems to be a reasonable choice in the context of poor data quality.

The market has significantly increased rate cut pricing, and the volatility of dollar assets is notable: Dollar assets have quickly priced in the recovery of rate cut expectations and the weakening of the economy. CME data shows that federal funds futures traders expect three rate cuts in September, October, and December 2025, totaling 75 basis points, a significant rebound from the rate cut probability after the July FOMC meeting. In terms of assets, the S&P 500, Nasdaq, and Dow Jones indices have all declined significantly; the yield on 10-year U.S. Treasury bonds has dropped sharply by 14.62 basis points to 4.222%, and the 2-year yield has decreased by 25.49 basis points to 3.702%; the dollar index has fallen to 98.6900; and London gold has risen to $3,362.64 per ounce.

In terms of assets, China Galaxy Securities continues to believe that U.S. stocks may experience volatile adjustments in the third quarter due to high valuations and potential downward adjustments in nominal profits, while the upward movement in the fourth quarter may be smoother; the long-end U.S. Treasury yield still has the potential to approach 4.0% within the year, and if the yield temporarily exceeds 4.5%, it would provide trading opportunities; the overall trend of the dollar index remains weak, but there is a risk of a slight rebound in the euro after being oversold Risk Warning: The risk of immigration policy tightening impacting labor supply; the risk of tariffs impacting overall demand in the United States; the risk of errors in different statistical series and methods in the labor market