"Interest rate cut trades" dominate the U.S. market, tonight's "non-farm annual revision" will "add fuel to the fire"?

Against the backdrop of the U.S. economy "slowing down but not in recession," "rate cut trades" are fully dominating Wall Street, with investors betting that the Federal Reserve is about to enter a loosening cycle, and tonight's "non-farm annual revision" is expected to further "add fuel to the fire."

After a brief decline triggered by weak employment data last week, U.S. stocks quickly rebounded, with the Nasdaq index even reaching a record closing high. Market traders generally expect the Federal Reserve to begin nearly three rate cuts starting in September this year. Influenced by this expectation, U.S. Treasury yields have continued to rise, with the two-year Treasury yield remaining at its lowest level since 2022, while the dollar has correspondingly weakened.

(U.S. stock benchmark index intraday performance)

The preliminary benchmark revision of non-farm employment released tonight is expected to inject more catalysts into this optimism. Several economists predict that the number of jobs in the U.S. may be significantly revised down by nearly 800,000 for the year ending in March, which will strongly demonstrate that the cooling of the labor market began much earlier than the data shows, further consolidating the market's expectations for Federal Reserve rate cuts.

For investors, the core question in the market has shifted from "Will the Federal Reserve cut rates?" to "How many times and how quickly will they cut rates?" Tonight's employment revision data, along with the core CPI inflation data to be released this Thursday, will jointly provide key guidance for the Federal Reserve's future policy path and determine how far this current rally driven by easing expectations can go.

Market Not Betting on "Soft Landing" Rate Cuts

The mainstream narrative on Wall Street is that the Federal Reserve will initiate rate cuts against the backdrop of economic slowdown but not recession, which historically tends to be favorable for the stock market.

Jim Reid of Deutsche Bank points out that historical data shows that within two years of the start of a rate cut cycle during non-recession periods, the median increase of the S&P 500 index can be as high as 50%.

This optimistic sentiment has been echoed by several top investment banks. Strategists at Goldman Sachs, led by David Kostin, believe that as lagging sectors like small-cap stocks catch up in the context of economic resilience, the upward trend in U.S. stocks is likely to continue.

Michael Wilson of Morgan Stanley also reiterated that the U.S. economy is shifting to what is known as the "early cycle" phase, which will support a "sustained and broad" recovery in earnings, even if market volatility may increase in the short term.

Rate cut expectations have already impacted the prices of various assets, with the U.S. two-year Treasury yield dropping to its lowest level since 2022, reflecting strong market expectations for a reduction in short-term policy rates.

Bill Campbell of DoubleLine Capital expects that if the Federal Reserve initiates aggressive rate cuts, the U.S. yield curve will further steepen. He believes that loose monetary policy will encourage risk appetite in the credit market in the short term, allowing high-risk assets to continue trading at very expensive valuation levels. Meanwhile, the clearest expression of this policy combination will be "a weaker dollar and a steeper yield curve."

Non-Farm Payroll Revision Coming, Potentially Significantly Downgrading Employment Data

Tonight's data release will be a key event that could ignite the market in the short term. Economists widely predict that the preliminary benchmark revision to be released by the U.S. Bureau of Labor Statistics may show that employment growth as of March this year is much weaker than currently indicated.

Economists from Wells Fargo, Comerica Bank, and Pantheon Macroeconomics expect that March's employment numbers will be revised down by nearly 800,000, equivalent to an average monthly reduction of about 67,000 jobs. Predictions from Nomura Securities, Bank of America, and Royal Bank of Canada are even more pessimistic, suggesting that the downward revision could approach 1 million. Comerica's Chief Economist Bill Adams stated, "A significant downward revision to employment growth will increase the pressure on the Federal Reserve to ease policy."

This annual revision aims to calibrate the employment report based on monthly surveys with the more accurate but lagging "Quarterly Census of Employment and Wages" (QCEW) data.

If a significant downward revision occurs, it would imply that the cooling of the job market actually began earlier, which would support those who believe the Federal Reserve should have cut rates sooner. Notably, Federal Reserve Governor Christopher Waller previously indicated that he expects the benchmark revision to reduce average monthly employment growth by about 60,000.

Debate on Rate Cut Path: Dovish Easing or "Hawkish Rate Cuts"?

From the market's perspective, a rate cut in September is almost a "done deal." Chris Larkin from ETrade, a Morgan Stanley subsidiary, stated that unless there is a "major surprise" in this week's inflation data, it will be difficult to change the Federal Reserve's decision to cut rates next week.

However, the real divergence lies in the subsequent policy path. Megan Horneman from Verdence Capital Advisors pointed out that the biggest question facing investors is how many more rate cuts will follow. She warned that if inflation data remains stubborn, the Federal Reserve may issue hawkish statements while cutting rates, signaling a "hawkish rate cut" to remind the market of its determination to control inflation.

After the non-farm revision, Thursday's CPI data will be key in determining market sentiment. Strategists from Bespoke Investment Group stated, "After Thursday morning, the market will either focus solely on stagflation or think about three more rate cuts before the end of the year."

Dennis DeBusschere from 2V Research believes that "aggressive rate cuts are imminent," noting that his model shows the fair value of the S&P 500 index at 7,000 points. Mark Haefele from UBS Global Wealth Management expects that the Federal Reserve may cut rates by a cumulative 100 basis points over four meetings from September to January next year.

However, there are also cautious viewpoints in the market. Andrew Tyler from JPMorgan warned that a rate cut in September could trigger a "sell the fact" market reaction, while Lori Calvasina from Royal Bank of Canada Capital Markets cautioned that the current stock market pricing is already "perfect" and has weak resistance to negative news