CMS: Weak non-farm payrolls catalyze increased expectations for Federal Reserve rate cuts

According to the Zhitong Finance APP, CMS released a research report stating that the weak August non-farm payroll data (an increase of 22,000, far below expectations) combined with the unemployment rate rising to 4.3% has solidified market expectations for the Federal Reserve to cut interest rates in September, triggering investor bets on a more aggressive rate cut pace (such as 50 basis points or consecutive cuts). The data indicates a significant cooling of the labor market, with not only weak job growth and a substantial downward revision of previous values, but also flat working hours and a slowdown in hourly wage growth. The market reacted sharply, with U.S. Treasury yields falling significantly and the dollar weakening, while concerns about economic cooling also put pressure on U.S. stocks.

Core Views

After the downward revision of July's U.S. non-farm data, the August non-farm payroll data again came in significantly below expectations. Due to the weak JOLTS and ADP employment data released mid-week, and the overseas market's expectation that the BLS will significantly revise down the non-farm benchmark data, the expectation for a Federal Reserve rate cut in September was basically established before the data release. After the data was released, the 2-year U.S. Treasury yield fell again by about 11 basis points, and the overseas market began to anticipate a 50 basis point rate cut or consecutive cuts in September, leading to a weaker dollar index and adjustment pressure on U.S. stocks driven by economic fundamental cooling.

Specifically: 1) In August, non-farm payrolls increased by 22,000, significantly lower than the market expectation of 75,000. The previous month's data was revised down again, with July's non-farm payrolls adjusted from an initial value of 73,000 to 79,000, and June's data was revised down again to -13,000, marking the first negative value since April 2020.

1. By industry, construction, manufacturing, business services, and government sectors all showed significant cooling, while education and healthcare services and the leisure and hospitality industry were the main supports. The government sector recorded -16,000 (previous value 2,000), with the federal government’s decline expanding to -15,000 (previous value -10,000). Due to the BLS previously counting those continuously receiving severance pay as part of employment, the lagging impact of DOGE layoffs is still emerging; state governments recorded -13,000 (previous value -5,000), and local governments recorded 12,000 (previous value 17,000). Business services recorded -17,000 (previous value -10,000), and temporary support services recorded -10,000 (previous value -10,000). Construction recorded -7,000 (previous value -1,000). The education and healthcare services sector, as a main support project, saw a marginal slowdown in growth, recording 46,000 (previous value 77,000). The leisure and hospitality industry saw a seasonal rebound, recording 28,000 (previous value 6,000).

2. From the household survey data, there was a rebound on the supply side of the labor market, with the labor force participation rate slightly rising to 62.3% (previous value 62.2%) after three consecutive months of decline, driving the unemployment rate up to 4.3% (previous value 4.2%). Among these, the labor force participation rate for those aged 25-54 rebounded to 83.7% (previous value 83.4%). The U3 unemployment rate in August rose to 4.3% (previous value 4.2%), while the U6 unemployment rate, which covers the broadest range of workers, rose to 8.1% (previous value 7.9%), reaching a high point in nearly two years. By ethnicity, the white unemployment rate remained flat at 3.7% (previous value 3.7%), the Asian rate fell to 3.6% (previous value 3.9%), and the Black rate continued to rise to 7.5% (previous value 7.2%)

3. The average weekly working hours in the private sector recorded 34.2 hours (previous value 34.2 hours), with weak data reflecting a cooling demand for labor among enterprises. The hourly wage growth continues to cool, with a year-on-year increase of 3.7% (previous value 3.9%) and a month-on-month increase of 0.27% (previous value 0.33%). Among them, the construction industry's hourly wage growth recorded a month-on-month increase of 0.6%, and utilities recorded 1.2%. Considering that the non-farm payroll additions in these industries are all negative, the price increase and volume decrease may reflect the impact of changes in immigration policies and a reduction in labor supply. The latest Federal Reserve Beige Book released this Thursday also mentioned that some regions reported a decrease in immigrant labor supply, which has a significant impact on the construction industry.

Due to the weak performance of the JOLTS and ADP employment data released mid-week, with ADP's new employment figures dropping to 54,000 (previous value 106,000), the yield on the 2-year U.S. Treasury bond had already shown a downward trend before the non-farm data was released, and the expectation of a 25 basis point rate cut by the Federal Reserve in September has been basically established. Additionally, on September 9, the BLS will release the non-farm benchmark revision data, which Federal Reserve Governor Waller mentioned in a speech on August 28 may lead to a downward revision of about 60,000 in the monthly non-farm payroll additions. The overseas market has already fully anticipated the weak employment data and the downward revision.

After the release of this non-farm data, the yield on the 2-year U.S. Treasury bond fell again by 11 basis points to around 3.47%, and the overseas market began to expect a 50 basis point rate cut by the Federal Reserve in September or consecutive rate cuts. The U.S. dollar index fell to 97.5, and the depreciation pressure on the British pound and Japanese yen significantly eased. The cooling pressure on the economic fundamentals led to a slight adjustment in U.S. stocks, with the Dow Jones Industrial Average adjusting 0.7% to around 45,300 points.