HUAXI Securities comments on the U.S. August non-farm data: Extremely weak performance may further raise interest rate cut expectations

According to the Zhitong Finance APP, Huaxi Securities released a research report stating that on September 5th, the U.S. Department of Labor announced the non-farm payroll data for August, which showed an increase of 22,000 jobs, compared to an estimated increase of 75,000. The July figure was revised up by 6,000 to 73,000, while the June figure was revised down by 40,000 to -13,000. The unemployment rate stood at 4.3%, in line with market expectations of 4.3%, and up from the previous value of 4.2%. Following the data release, gold rose by more than 1%, and the yield on 10-year U.S. Treasury bonds fell by about 10 basis points to 4.06%. How should we view the impact of this non-farm data?

First, non-farm employment continues to be weak, and the market expects consecutive rate cuts in September, October, and December.

The August non-farm data continued the weakness seen from May to July, with only 22,000 new non-farm jobs added. The average for the past four months is 27,000, while the average from May 2024 to April 2025 is 150,000. The job creation capacity of the labor market is "precarious," with the average new jobs in the private sector over the past four months being only 39,000, marking the weakest phase since the pandemic (the average from June to August last year before the rate cuts was 46,000). Not only does the non-farm data send a signal, but previously released data on job vacancies, ADP employment, Challenger layoffs, and unemployment claims all consistently point to a weak labor market. The contradiction in the current total employment data dominates, and we will no longer elaborate on structural data. As a result, market expectations for rate cuts this year have risen from about 60 basis points to 72 basis points, meaning the market bets that the Federal Reserve will cut rates by 25 basis points at all three meetings this year (September 18, October 30, and December 11, Beijing time).

Second, the unemployment rate and wages also support rate cuts.

Since February this year, the unemployment rate has fluctuated narrowly between 4.1% and 4.2%. In August, the unemployment rate was 4.32%, an increase of 0.08 percentage points from the previous month, the highest level since 2021. The Federal Reserve's June meeting projected this year's unemployment rate at 4.5%, and 4.3% is still slightly below that level. Additionally, the unemployment rate rose by a total of 0.2 percentage points in July and August, which is more stable compared to the second half of last year (before the Fed's rate cut in September last year, the unemployment rate in July and August triggered the "Sam Rule," where the three-month moving average of the unemployment rate exceeded the previous year's low by more than 0.5%, historically corresponding to an economic recession). Behind this is a simultaneous slowdown in supply and demand in the U.S. labor market this year, with job creation in the private sector slowing down while immigration restrictions have weakened labor supply. In terms of wages, the hourly wage in August increased by 0.28% month-on-month, corresponding to an annual rate of about 3.3%, with the average month-on-month increase over the past four months being 0.29% (annual rate of about 3.6%). Compared to the average month-on-month increase of 0.32% (annual rate of about 3.9%) in the four months before the rate cut last September, the current month-on-month increase in hourly wages is lower. Therefore, both the unemployment rate and hourly wage data support the Fed's rate cuts.

Third, have rate cut expectations reached their peak this year? They may continue to heat up.

In the short term, attention should be paid to the next two key data releases. First, on September 9th, the BLS will release the preliminary annual benchmark revision for non-farm employment (from April 2024 to March 2025). If the downward revision of annual employment numbers exceeds expectations, it may exacerbate concerns about labor market weakness. Second, the CPI data to be released on September 11th; however, inflation must be lower than expected for rate cut expectations to continue to heat up If multiple subsequent data points indicate a risk of economic downturn in the United States, expectations for interest rate cuts may further rise to the range of 75-100 basis points.

Does this mean that after the interest rate cut in September, cuts in October and December can also be realized? The answer is uncertain; the probability of an interest rate cut in October is relatively higher, while the certainty for December is lower. Since October 2023, the U.S. has experienced several rounds of similar situations. If the market has priced in too many expectations for interest rate cuts, the yield on government bonds may decline significantly, leading to a weakening of market interest rates' constraints on inflation, which in turn increases the risk of accelerating inflation. A typical example is the second half of last year, when after the Federal Reserve cut rates by 100 basis points in three meetings, the process of disinflation stalled, and they could only continue to pause rate cuts. If the market aggressively prices in a rate cut of 75-100 basis points within the year, history may repeat itself. Moreover, currently, not only is there persistent service inflation, but there is also the possibility that tariffs gradually transmit to retail prices, making the inflation situation more complex than last year. Therefore, after the expectations for rate cuts cooled from May to July this year, the period from August to October is a phase of rising expectations for rate cuts, with a high probability of rate cuts in September and October. However, November and December may re-enter a process of cooling expectations for rate cuts, making it difficult to predict whether a rate cut will occur in the December meeting.

Fourth, for various assets, recession trades may marginally heat up, but are unlikely to dominate, potentially replaced by concerns over stagflation.

After the non-farm payroll data was released, U.S. Treasury yields generally fell by over 10 basis points, the dollar briefly dropped nearly 0.5%, gold rose by more than 1%, and U.S. stocks fell slightly. These market performances point to concerns about economic slowdown, overshadowing the rising expectations for interest rate cuts. The risk of U.S. stocks shifting towards recession trades is increasing, but the probability of subsequent stagflation risks may be higher. On one hand, given the weakness in the labor market and consumption, the direction of the U.S. economic slowdown is relatively certain, while tariffs and AI capital expenditures promoting domestic investment can only partially offset the impact of consumption slowdown. On the other hand, while wage growth pressures from the labor market are easing, the price transmission brought about by elevated tariffs and persistently high fiscal deficits means that the disinflation situation in the U.S. is more complex. In this environment, rising expectations for interest rate cuts may give rise to secondary inflation risks.

In a quasi-stagflation environment, gold is relatively favored, and it also benefits from the declining independence of the Federal Reserve. The volatility of equity assets is amplified, and their anti-inflation properties remain superior, with the technology sector, which is relatively insensitive to economic cycles, likely to continue generating excess returns. For U.S. Treasuries, the certainty of short-term interest rates is higher than that of long-term rates. The yield on 10-year U.S. Treasuries may maintain a range-bound fluctuation within the year, rather than a downward trend. Yields on Treasuries with maturities of 10 years or more not only face potential shocks from inflation risks but will also be negatively impacted by the weakening independence of the Federal Reserve, as well as external drag from the volatility of ultra-long bonds in Europe, the UK, and Japan