U.S. August non-farm payroll growth falls short of expectations, market increases bets on the Fed cutting interest rates by 50 basis points in September

According to Zhitong Finance, the U.S. non-farm payroll data for August fell short of expectations, leading to increased market bets on a 50 basis point rate cut in September. The seasonally adjusted non-farm employment in the U.S. increased by 142,000 in August, below the expected 160,000. At the same time, the previous value was revised from 114,000 to 89,000, and the non-farm employment numbers for June were revised from 179,000 to 118,000; after the revisions, the total non-farm employment for June and July was 86,000 lower than the pre-revision total. The U.S. unemployment rate in August was recorded at 4.2%, meeting market expectations and hitting a new low since June this year, marking the first decline after four consecutive months of increase.

Although layoffs are still largely restrained, many companies are delaying expansion plans due to high borrowing costs and uncertainty before the November presidential election. Hiring in the healthcare and social assistance sectors drove the growth in employment numbers. Recruitment in the construction and government sectors also increased. The diffusion index measuring the breadth of job growth has risen. The participation rate in August remained unchanged at 62.7%. The participation rate of workers aged 25-54 declined for the first time since March.

In August, the U.S. economy created slightly fewer jobs than expected, reflecting a slowdown in the labor market and paving the way for the Federal Reserve to cut interest rates later this month. Following the data release, traders increased their bets on a 50 basis point rate cut by the Fed in September, with the probability rising to nearly 50%. The yield on the 10-year U.S. Treasury bond fell to 3.657%, the lowest level since June 2023; the yield on the 2-year U.S. Treasury bond dropped by 11 basis points to 3.63%.

As the report was released, the market felt uneasy about the Fed's next move. Since July 2023, the Fed has maintained interest rates unchanged after a series of significant rate hikes to curb inflation. Prior to the data release, the market had been expecting the Fed to possibly start cutting rates at the meeting on September 17-18, with the only question being the size of the rate cut.

Seema Shah, Chief Global Strategist at Principal Asset Management, said: "For the Fed, the decision ultimately comes down to which risk is greater: if they cut rates by 50 basis points, it will reignite inflation pressures; if they only cut rates by 25 basis points, it will threaten economic recession." Overall, in the case of weakening inflationary pressures, the Federal Reserve has no reason to act recklessly and cut interest rates prematurely." In addition to non-farm payrolls, other economic data released this week also indicate continued economic growth, but a slowdown in the labor market. Payroll processing company ADP reported on Thursday that private companies added only 99,000 jobs in August, while outplacement firm Challenger reported a significant increase in layoffs in August, with hiring slowing to the lowest level since at least 2005.

Most Federal Reserve officials have also indicated that they expect interest rates to fall. Federal Reserve Chairman Powell stated in his key annual speech at the Jackson Hole conference that the "time for adjusting policy has come," but he did not specify what this meant.

TD Securities pointed out that until the Federal Reserve makes a clear statement, the market will continue to struggle with the extent of the rate cut. TD Securities' U.S. rate strategist Gennadiy Goldberg said, "Will the rate cut be 25 basis points or 50 basis points in September? The market is really struggling with this question. The August non-farm payrolls report is in the middle ground that can be used as a reason for a 25 or 50 basis point rate cut. If you think the Fed is playing a more aggressive role, the increase in August non-farm payrolls can be used as a reason for a 50 basis point rate cut. If you think the Fed wants to be more cautious, then it is more reasonable to use it as a reason for a 25 basis point rate cut. Therefore, until the Fed somehow indicates support for 25 or 50 basis points, the market will truly remain balanced. We do see that the labor market is not only truly beginning to balance, but is indeed starting to cool significantly, which may make the Fed quite nervous