HTSC: The actual trend of US non-farm employment weakened significantly in June, and it is highly probable that the interest rate cut cycle will begin in September

According to the information from Zhitong Finance APP, Huatai Securities released a research report stating that the June non-farm data is in line with our previous judgment on the slowdown of the U.S. economy and the decrease in resistance to interest rate cuts. The probability of a rate cut in September has further increased—without significant fluctuations in the data, it is now a high probability event to start the rate cut cycle in September. Compared to before the data was released, the yields of 2-year and 10-year government bonds decreased by 3bp and 2bp to 4.64% and 4.30% respectively. The probability of a rate cut before September remained at 80%, with the cumulative rate cut for the year increasing by 1bp to 49bp, and the U.S. dollar index remaining at 104.9.

In June, the U.S. added 12,000 non-farm jobs, bringing the total to 206,000, higher than the consensus expectation of 190,000. The figures for April and May were revised down by a total of 110,000. Hourly wages fell by 0.1% to 0.3%, in line with expectations. The unemployment rate unexpectedly rose to 4.1%, while the labor force participation rate unexpectedly increased by 0.1pp to 62.6%. Average weekly working hours remained at 34.3 hours (Charts 1-3). Although non-farm job additions in June exceeded expectations, the actual trend is weak: non-farm job additions for April and May were significantly revised down; private sector non-farm job additions were 136,000, below the expected 160,000; household survey-based job additions were only 116,000, coupled with the rise in labor force participation rate, leading to an increase in the unemployment rate to 4.1%, exceeding the Fed's guidance for the fourth quarter unemployment rate in the June SEP. Hourly wages remained at 0.3% month-on-month, with further trends needing to be observed.

In June, non-farm job additions slightly declined, dragged down by the service sector employment, with weak performance in private sector employment and a rebound in government sector employment. In June, private sector non-farm job additions were only 136,000, mainly due to a 64,000 decrease in new jobs in the service sector to 117,000, with significant declines in business services (down 48,000 from May), retail (down 16,000 from May), and leisure and hospitality (down 15,000 from May), consistent with the weakening of the June ISM Services PMI; wholesale trade increased by 13,000 from June, with little change in other service sector job additions. Goods sector non-farm job additions rose to 19,000 in June: construction added 27,000 jobs, while manufacturing decreased by 8,000, with declines in both durable and non-durable goods (Chart 5). Government sector employment increased by 45,000 to 70,000, the second highest level in the first half of the year, but the average for the second quarter was 32,000 per month, continuing to slow down compared to 64,000 per month in the first quarter.

In June, the month-on-month growth rate of hourly wages fell by 0.1% to 0.3%, in line with expectations, with overall wage increases in the goods sector and a slowdown in wage growth in the service sector. The 3-month annualized growth rate of hourly wages in June fell from 4.0% in May to 3.6% (Chart 4). Specifically, hourly wages in the goods sector increased by 0.1% to 0.4% month-on-month, with wages generally rising except in the durable goods industry; hourly wages in the service sector fell by 0.1% to 0.3%, with only marginal increases in transportation and warehousing and business services, while the rest saw marginal declines The June non-farm data shows that the growth momentum of the US economy in the second quarter may have slowed to near potential growth rate, and may continue to weaken in the future. The average monthly increase in non-farm employment in the second quarter was 177,000, significantly slower than the 267,000 in the first quarter, possibly returning to the trend level of US growth, in line with our previous assessment of the US economic slowdown. The recent significant slowdown in immigration inflows, with illegal border crossings in the southern border dropping to a three-year low in June, may be a possible reason behind the weak growth in non-farm employment. In addition, high-frequency job vacancy data for June indicates that employment demand is still slowing down (Chart 6). Looking ahead, the slowdown in immigration inflows combined with the decline in employment demand may put further pressure on the growth of non-farm employment in the US, while the ratio of job vacancies to unemployed persons in May fell to 122%, indicating that hourly wages may continue to cool down in the future.

The June non-farm data raises the probability of a rate cut in September - focus on next week's CPI data, if the data does not show significant fluctuations, it is likely that the rate cut cycle will begin in September. Powell has repeatedly stated that the conditions for a rate cut are a surprisingly weak job market and increased confidence in inflation returning to target. The recent weakening of broad-based economic data in the US, especially the May CPI data and June non-farm data, have helped to strengthen the Fed's confidence in inflation returning to target. Although the Fed's June FOMC dot plot indicates only one rate cut this year, as Powell has said, the dot plot is just a prediction based on data, and the actual rate cut path still depends on the data. If economic data does not show significant fluctuations, especially if next Friday's June CPI data continues to show a weak trend, then it is likely that the rate cut cycle will begin in September.

Risk Warning: US financial risks exposed under high interest rates; Fed rate hikes later than expected.