The number of initial jobless claims in the United States hits a nearly 3-year high, boosting rate cut expectations once again! However, the market is increasingly concerned about the "Sam Rule"

According to the Zhitong Finance and Economics APP, the number of initial claims for unemployment benefits in the United States last week saw the largest increase since early May. At the same time, the number of continued claims for unemployment benefits also increased significantly, further proving that the U.S. labor market is in a sluggish state. This has stimulated the market to continue pricing in a 100% probability of a rate cut in September, with increasing probabilities of rate cuts in November and December. Some economists are concerned that if the number of initial and continued claims for unemployment benefits continues to rise, leading to a continuous increase in the U.S. unemployment rate, it may eventually trigger the "Sam Rule" that suggests an economic recession. The dream of a "soft landing" for the U.S. economy envisioned by Federal Reserve officials will be completely shattered.

According to data released by the U.S. Department of Labor on Thursday, the number of initial claims for unemployment benefits for the week ending July 13 increased significantly by 20,000 people compared to the previous reporting week, reaching 243,000 people, a level almost equal to the highest level since August 2023. The latest number of initial claims for unemployment benefits exceeded the economists' general expectation of 229,000 people.

For the week ending July 6, the number of continued claims for unemployment benefits in the United States increased significantly by 20,000 people, reaching a staggering 1.87 million people, setting a new high since November 2021.

In the view of some economists, at this time of year, the data on initial claims for unemployment benefits tends to show significant weekly fluctuations, including holidays such as Independence Day prompting government departments to reduce outsourced labor, and schools closing for summer vacation. However, the recent surge in the number of continued claims for unemployment benefits is rare on such a large scale in nearly three years.

The continuous increase in initial claims for unemployment benefits, along with the surge in continued claims for unemployment benefits, coupled with the recent cooling of non-farm employment numbers and an unemployment rate exceeding 4%, largely indicates that fault lines in the U.S. labor market are deepening. The unemployment rate in July may even exceed the 4.1% rate in June. As more Americans struggle to find jobs, the lack of strong income support implies that U.S. consumer spending is about to enter negative growth territory. A decline in consumer spending will undoubtedly have a serious negative impact on the U.S. economy, considering that 70%-80% of the components of U.S. GDP are closely related to consumption.

Before seasonal adjustment effects, the number of initial claims for unemployment benefits in the United States climbed by 36,824 people in the week, reaching 279,032 people, the highest level since January. Texas and California were the states with the fastest growth in initial claims for unemployment benefits. Georgia, Pennsylvania, Missouri, and New York also saw significant increases in applications.

Other reports indicate that U.S. employers have significantly slowed down their hiring pace, with the U.S. unemployment rate rising to 4.1% last month, reaching the highest level since 2021 The slowing job market and recent slowdown in inflation have provided ample reasons for the Federal Reserve to start cutting interest rates in September and to cut interest rates for the second time in November or December, with some interest rate futures traders even betting on three rate cuts by the end of the year.

Recently, the U.S. interest rate futures market's bets on when the Fed will cut rates have finally reached a major moment. Interest rate futures traders have priced in a 100% chance of a rate cut by the Fed in September for the first time, and the probability of a rate cut in December has quickly risen to nearly 60%, meaning that the vast majority of traders are betting that the Fed will cut rates twice, rather than just once as implied by the Fed's dot plot.

Last Friday, economists from Barclays Bank adjusted their forecasts for Fed policy, expecting a second rate cut in December following the announcement of a rate cut in September. Some interest rate futures traders even bet on three rate cuts this year, with the probability of a rate cut in November recently rising above the key 50% mark.

" Continued claims for unemployment benefits are steadily rising, while initial claims for unemployment benefits are on a continuous upward trend, indicating that the labor market is rapidly cooling. We expect the unemployment rate to climb in the second half of 2024, eventually reaching 4.5% by the end of the year," said Bloomberg Economics economist Stuart Paul.

Jim Smigiel, Chief Investment Officer at SEI, said that the expectation of three rate cuts by the Fed this year seems too high, with a high likelihood of two rate cuts. In a report, he stated, "We don't expect to see that scenario." "A 25 basis point rate cut in September seems very likely, with further cuts in December still on the table."

The U.S. unemployment rate is just one step away from triggering the "Sam Rule" with a 100% accuracy rate for predicting recessions!

If overall economic data, including non-farm payroll data, unemployment rate, and wage growth data, suggest that U.S. inflation is likely to smoothly decline to 2%, even if the latest inflation does not fall to 2%, the Fed may still start a rate-cutting cycle.

Powell told lawmakers last week that Fed officials are increasingly vigilant about the potential risk of a significant cooling in the labor market, while waiting for more evidence of slowing inflation. Powell emphasized in Congress that the Fed has made significant progress in combating inflation and may not need to wait for the inflation rate to fall to 2% before cutting rates.

Looking at the crucial Sam Rule, the latest 3-month average of the U.S. unemployment rate is about 0.42% higher than the 12-month low, getting closer to the 0.5% threshold of the Sam Rule trigger. The core theory of the "Sam Rule" is that when the 3-month average of the unemployment rate is 0.5 percentage points higher than the 12-month low, it usually indicates that the economy is in a recession.

Triggering the economic recession indicator "Sam Rule" is like completely opening the Pandora's box of economic recession. Since economist Sam introduced the "Sam Rule," the accuracy of this indicator in predicting economic recessions has been 100%, with all 11 U.S. economic recessions since 1950 confirming the "Sam Rule." With the increasing number of initial claims for unemployment benefits and the growing number of continued claims for unemployment benefits, the market is becoming more concerned that the unemployment rate may trigger the "Sam Rule" in July or August, which largely means that the American dream of a "soft landing" for the U.S. economy envisioned by Federal Reserve officials is completely shattered.

Deutsche Bank believes that in recent years, the Federal Reserve's monetary policy should not directly respond to a labor market that is biased towards tightness. Due to the unemployment rate being below the median of the SEP forecast of the Federal Reserve over a longer period, the labor market has not shown any significant cracks.

However, in the long run, the latest U.S. unemployment rate is currently only 0.1 percentage point lower than the SEP forecast value of the Federal Reserve. The labor market is on the edge of a gap, which will once again require a response from the Federal Reserve's monetary policy. Economists at Deutsche Bank stated that under the gap rule in the Federal Reserve's balancing approach, once the U.S. unemployment rate reaches its long-term level, for every 10 basis points increase in the unemployment rate, a 20 basis points reduction in the federal funds rate is required.