CICC International: Non-farm payroll in September significantly exceeded expectations, suppressing recession "narratives" and rate cut expectations

According to the Wise Finance APP, after the release of the September non-farm data by the Federal Reserve, analysts at CICC commented that the data exceeded expectations across the board, easing the market's previous excessive recession concerns. Looking ahead, before the November FOMC (November 8th), there will be one September inflation data release, one October non-farm data release, and the election (November 5th). If nothing unexpected happens, a 25 basis point rate cut is highly probable. CICC believes that trading the rate cut should be done cautiously. Compared to US bonds and gold, the more certain beneficiaries of the Fed rate cut are short-term bonds (short-term bonds have better cost-effectiveness than long-term bonds, and the yield curve should be steepened), gradually recovering real estate chains (potentially even boosting China-related export chains), and copper is also gradually gaining attention, although it is currently somewhat on the left side and needs to wait for several more data points to confirm.

The September non-farm data exceeded expectations in several aspects: first, there were 254,000 new jobs created, significantly surpassing the expected 150,000 and the previous month's 142,000; second, the July non-farm data was revised upward from 89,000 to 144,000; August was revised from 142,000 to 159,000, reversing the continuous downward revisions in the previous months that raised concerns about data quality; third, the unemployment rate dropped from 4.2% to 4.1%; fourth, wages both month-on-month and year-on-year exceeded expectations, with previous values being revised upwards; fifth, the temporary unemployment that significantly hindered employment in the previous two months has basically disappeared.

From various perspectives, this non-farm report exceeding expectations may lead to: first, easing the market's previous excessive recession concerns; second, it may also reduce market expectations for a Fed rate cut. At the time of this commentary, the CME interest rate futures have already priced in two rate cuts within the year, both at 25 basis points; third, whether this will trigger renewed inflation concerns is still worth observing. After a recent strike by dock workers led to significant wage increases, the decrease in unemployment this time is more due to supply factors, and wage growth has also exceeded expectations.

From an asset perspective, after the data release, US bond yields jumped to above 3.9%, the US dollar strengthened, gold fell, and US stock futures surged. In fact, US bond yields have been rising recently, and after the Fed rate cut, instead of falling, they have risen by nearly 40 basis points from the recent bottom.

CICC points out that trading the rate cut should be done moderately with a "reverse thinking, reverse action" approach. The full incorporation of expectations and the early decline in long-term rates have increased the possibility of an economic "soft landing," thereby reducing the need for the Fed to cut rates by as much.

CICC has repeatedly warned that after the 10-year US bond yield rate cut is realized, it may gradually bottom out and rise again, similar to the rate cut cycle in 2019. It should be approached with caution, similar to gold. Looking back, recent trends have validated this point, with the September FOMC's aggressive rate cut marking a temporary low point for US bond yields. At this point, although it may not be completely disproven yet, the more certain beneficiaries of the Fed rate cut are short-term bonds (short-term bonds have better cost-effectiveness than long-term bonds, and the yield curve should be steepened), gradually recovering real estate chains (potentially even boosting China-related export chains), and copper is also gradually gaining attention, although it is currently somewhat on the left side and needs to wait for several more data points to confirm