The U.S. unemployment rate unexpectedly rose, approaching the "Sam Rule" trigger! Calls for a rate cut in September sweep Wall Street

According to the Wise Finance APP, the recruitment and wage growth data in the United States in June slowed significantly, and the unemployment rate unexpectedly rose to the highest level since the end of 2021, approaching one of the crucial signals of an economic recession, the "Sam Rule". More remarkably, the previously announced non-farm employment numbers for April and May were significantly revised downward after official retracement. These latest data, combined with recent releases of multiple noticeably weak economic data, have significantly strengthened market expectations that the Federal Reserve will start cutting interest rates in September and cut rates twice this year.

Data released by the US Bureau of Labor Statistics on Friday showed that non-farm employment in the United States increased by about 206,000 in June, significantly higher than the widely predicted increase of 190,000 by economists. A rare scene was that the employment growth in the previous two months was revised downward by 111,000, which is extremely rare in the history of official non-farm employment statistics.

The latest revised data shows that the number of new non-farm jobs in the United States in April was revised down from the previously announced 165,000 to 108,000; the number of new non-farm jobs in May was revised down from 272,000 to 218,000. After revision, the total number of new jobs in April and May decreased by 111,000 compared to the pre-revision. In the past 5 months, employment numbers have been revised downward in 4 months.

In addition, as more people enter the US labor market, average hourly wages show a significant downward trend, while the unemployment rate unexpectedly rose to 4.1%, higher than the market's expected 4%, and rising faster than Federal Reserve officials' expectations.

The latest data highlights that the average employment growth rate in the past three months has slowed to the lowest level since early 2021, reflecting a greater cooling of the labor market in the second quarter than previously estimated. This data, along with other widely reported economic data, collectively shows a significant reduction in job vacancies in the US this year, a continuous increase in applications for unemployment benefits, a slump in the service and manufacturing industries, and a significant slowdown in consumer spending trends.

Weak non-farm employment data may further drive down overall income for American consumers, thereby prompting even weaker consumer spending. Consumption, as the "giant wheel," is considered the "core driving force" of the US economy, with all consumption statistics accounting for 70%-80% of US GDP data. If personal consumption continues to slow down, the US economy seems to be getting closer to falling into an economic recession.

The continued slowdown in employment, coupled with recent data indicating a significant slowdown in the US economy and multiple hints of inflation slowing down, supports the market bet that Federal Reserve policymakers will cut interest rates as early as September. This employment report is the last report for Federal Reserve officials before the interest rate meeting later this month, with the next interest rate meeting scheduled for September After the report was released, the yield on US Treasury bonds fell sharply, indicating that funds flowed into Treasury bonds under the risk-averse trend, prompting bond prices to rise, and the three major US stock index futures rose slightly under the expectation of interest rate cuts. According to the interest rate futures market, traders currently expect the Fed to cut interest rates twice this year, rather than just once as shown in the latest Fed dot plot. Traders are betting on the first rate cut in September and the second in December.

In June, the labor force participation rate in the United States - the proportion of the population working or looking for work - rose to 62.6%. The labor force participation rate for workers aged 25-54 (also known as prime-age workers) rose to a 22-year high of 83.7%.

In June, about three-quarters of the new jobs came from the US healthcare industry and government departments with strong labor demand. A concerning sign is that the number of temporary workers in the US saw the largest decline in over three years. Manufacturing employment also decreased by about 8,000, the largest drop since February.

Wage growth continues to cool. In June, the average hourly wage in the US increased by only 3.9% compared to the same period last year, marking the smallest annual increase in three years. The wage growth for the majority of workers, production and non-supervisory employees, was close to 4%.

"The significant downward revisions to the data for the previous two months, along with the unexpected rise in the unemployment rate, are important data points. At the same time, wage growth is also slowing," said Kathy Jones, Chief Fixed Income Strategist at Charles Schwab. "All of this together forms a very clear trend of slowdown."

"We expect the unemployment rate to reach 4.5% by the end of the year. If the unemployment rate in the July or August employment reports reaches 4.2%, we expect the Fed to announce a rate cut at the September 17-18 meeting," Bloomberg Economics economists Stuart Paul, Eliza Winger, and Estelle Ou stated in their latest report.

Market bets on rate cut in September are increasing

In the latest official economic forecast data released after the Fed interest rate decision, Fed officials lowered their expectations for three rate cuts this year to just one, maintaining a long-term high-rate policy stance and raising inflation expectations.

However, against the backdrop of a comprehensive slowdown in economic growth, the Fed is getting closer to the first rate cut, and the magnitude of the rate cut may be greater than expected in the dot plot, especially with the latest multiple soft economic data, as well as weak unemployment and employment figures, which may significantly boost the Fed's confidence in combating inflation and push the Fed closer to starting rate cuts later this year, as Fed officials do not want to see the economy slide into recession, which is not what they hope for with the "soft landing" of the US economy. As the most eye-catching part of the statement document released after the Federal Reserve interest rate decision, the median of the interest rate dot plot currently shows that most Federal Reserve officials expect only one rate cut in 2024, which is two cuts less than the forecast in the March dot plot, totaling a reduction of 50 basis points. This time, the dot plot also shows as many as four Federal Reserve officials supporting no rate cuts this year, with the 10 points supporting three rate cuts within the year in the March dot plot all disappearing.

However, in the interest rate futures market, traders are turning to betting on September as the first rate cut since the Fed's aggressive rate hike cycle. The "CME FedWatch Tool" shows that traders in the interest rate futures market have significantly increased their bets on the first rate cut in September. The probability of a rate cut in September has surged from less than 50% before the latest non-farm payroll data and unemployment rate announcement to the current high of 71.8%, while also betting on a second rate cut in December, with a probability close to 50%.

Overall, the recently released U.S. economic data has sparked a significant increase in expectations for a rate cut in September and two rate cuts within the year, rather than just one rate cut as implied by the latest Federal Reserve interest rate dot plot.

Nick Timiraos, a Wall Street Journal reporter known as the "Fed's mouthpiece," stated after the non-farm payroll data was released that the U.S. unemployment rate in June rose from 3.96% in May to 4.05% in June. This data has increased by 0.22% since March (3.83%). From the crucial Sam rule perspective, the 3-month average has risen by 0.42% from the 12-month low, getting closer to the threshold of 0.5%. The core 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 an economic recession.

Goldman Sachs economists still believe that the Fed will cut rates twice this year and believe that the U.S. labor market is at a turning point. Goldman Sachs economists including Jan Hatzius wrote in a report to clients that the strength of labor demand has clearly cooled, with initial jobless claims and continuing unemployment claims rising despite healthy non-farm payrolls. Hatzius and other economists wrote that the main driver of labor demand is economic activity, and GDP growth has slowed significantly. We are confident in our forecast that the Fed will cut rates twice this year (in September and December).

"The slowdown in rent growth, declining wage inflation, and the prospect of compressed retail profit margins suggest that core PCE will continue to rise at a pace below the Fed's expectations, laying an important foundation for the first rate cut in September and at least two rate cuts this year." "Pantheon Macroeconomics' Chief Economist Ian Shepherdson said.

Various corners of the U.S. economy are confirming a slowdown in growth, and the Fed's first rate cut is getting closer

In May, the U.S. core PCE price index fell more than expected, and recent data releases have shown a weak labor market supporting the hot consumption, causing the massive bullish forces in the U.S. stock market and traders betting on a rate cut in September to breathe a sigh of relief. This index can be described as the preferred data indicator for Fed officials to measure inflation.

In addition, revised economic data shows that in the first quarter, the core engine of the U.S. economy - U.S. personal consumption expenditure data, after revision, decreased by 0.5 percentage points compared to the initial value, equivalent to a final annualized quarterly rate of only 1.5%, a significant slowdown from the 3.3% growth in the previous quarter.

If personal consumption expenditure continues to slow down, and the weak labor market that provides the driving force for consumption, the U.S. economy seems to be getting closer to falling into an economic recession. Consumption, as the "giant wheel," is considered the "core driving force" of the U.S. economy, with all consumption items accounting for 70%-80% of U.S. GDP data. However, the latest revised economic data shows a significant crack in the U.S. labor market in the first quarter, with a clear slowdown in consumption expenditure.

Other data collectively show that every corner of the U.S. economy is confirming a slowdown in economic growth, and the talk of recession is making a comeback. For example, some commercial equipment orders and shipments are declining, the trade deficit is the largest in two years, there are signs of weakness in the job market, and housing sales are declining across the board.

On Wednesday, the U.S. released "small non-farm" ADP employment data for June, showing that private wage growth was below expectations, and weekly initial jobless claims were well above expectations. As of the week ending June 22, the number of ongoing claims for unemployment benefits increased to 1.86 million, the highest level since November 2021. The U.S. June ISM Services PMI fell well below expectations, with the contraction in service activity at the fastest pace in four years.

LPL Financial's Global Strategist Quincy Krosby pointed out that given data indicating that the U.S. economy is cooling down, Friday's non-farm payroll data could be crucial for the Fed, as the Fed is looking for reasons to signal loose monetary policy, and the non-farm data will help clarify the fundamental state of the labor market. Weak non-farm employment data may further drive overall income down, leading to even weaker U.S. consumer spending."