Weak non-farm payrolls ignite interest rate cut expectations; this week's inflation data becomes key to the Federal Reserve's next move

According to Zhitong Finance APP, the U.S. stock market closed lower last Friday due to a weak U.S. non-farm payroll report for August, which further demonstrated that the U.S. job market is rapidly cooling, raising concerns about the state of the U.S. economy. Following the release of the August non-farm payroll report, the market now expects a 100% probability of the Federal Reserve cutting interest rates at the September policy meeting.

As investors' attention gradually shifts to the Federal Reserve's policy meeting this month, the U.S. August CPI and PPI to be released this week will become the focus. In addition to inflation data, the U.S. September University of Michigan Consumer Sentiment Index, to be released on Friday, will provide another perspective, revealing the psychological feelings of American consumers amid a slowing job market and uncertain inflation outlook. Furthermore, this week’s earnings reports are relatively light, with earnings from Oracle (ORCL.US), Adobe (ADBE.US), and Kroger (KR.US) worth watching.

Weak Job Market, Limited Progress on Inflation

The Federal Reserve's dual mandate is to achieve full employment and maintain a 2% inflation rate. Last month, Federal Reserve Chairman Jerome Powell signaled a potential interest rate cut at the Jackson Hole Global Central Bank Conference, citing a weak job market and the risk of further rapid deterioration. Data released last Friday showed that the U.S. added only 22,000 non-farm jobs in August, confirming a straightforward signal that the current state of the U.S. job market is the weakest since the pandemic began.

This week, the Federal Reserve may find that progress in curbing inflation remains limited. Economists expect the U.S. August CPI to rise 2.9% year-on-year and 0.3% month-on-month, both of which are higher than July levels, indicating that the Federal Reserve is further from its inflation target. The core CPI, excluding volatile items such as food and energy, is expected to rise 3.1% year-on-year and 0.3% month-on-month, consistent with July levels.

Wells Fargo economists Sarah House and Nicole Cervi wrote in a report last Friday: "The U.S. July CPI data indicates that tariffs are not the only challenge the Federal Reserve faces in its fight against inflation. Stubborn service sector inflation, coupled with a rebound in commodity prices, has hindered the downward trend in inflation over the past two years and pushed inflation further away from the Federal Open Market Committee (FOMC) target."

They added: "Looking ahead, we suspect that higher tariff levels will persist in the long term, as the Trump administration has the authority to further increase tariffs beyond the International Emergency Economic Powers Act, which is currently under legal review."

After the pandemic, U.S. inflation once soared to a 40-year high, far exceeding policymakers' concerns about the job market. In fact, during this period of high inflation, the U.S. job market showed resilience. It wasn't until last Friday, when the June non-farm payroll data was revised down to a net loss of 13,000 jobs, that the first monthly job contraction since the end of 2020 was observed.

It is worth noting that Rick Rieder, Chief Investment Officer of Global Fixed Income at BlackRock, pointed out last Friday that nearly all of the new non-farm jobs in the United States over the past three months have come from the healthcare sector. Excluding healthcare, the total employment has seen negative growth for the first time in the past 25 years (excluding recession periods). And recessions, of course, are only officially confirmed after the fact.

Rick Rieder stated, "We have pointed out for months that healthcare has accounted for most of the new jobs over the past two to three years, but now it is also showing a significant decline, and the foundation of the job market seems to be cracking."

Rick Rieder expects the Federal Reserve to cut interest rates this month, but in the face of rising inflationary pressures, even with a pessimistic outlook for the U.S. labor market, the Fed's rate cuts in the coming months may remain "balanced and more restrained" at 25 basis points.

He said, "We believe that the view of the unemployment rate remaining relatively low (4.32%) is accurate, but not complete." "The significant slowdown in labor supply due to immigration has led to a simultaneous decline in the overall labor supply entering the market. However, the mobility and flexibility of the labor force are now extremely low."

The labor market is essentially a "confidence game," where workers' consumption depends not only on current income but also on their expectations of future income. In detail, many workers' current incomes still provide support. As of August, the number of unemployed in the U.S. was only 313,000 more than the same period last year. However, an increasing number of Americans expect unemployment numbers to continue rising, and this mentality has negative impacts on various aspects of the U.S. economy. For those outside the healthcare sector, the outlook has rarely been so disheartening