Interest rate cut in August "Struggle"

The conflicting performance of the non-farm data in July and August may tell us a truth, that is, to look at non-farm from a non-farm perspective. Whether to cut by 25bp or 50bp in September, the addition of new jobs and the unemployment rate in August seem to give completely opposite answers. In our previous report "How to Analyze Non-Farm Employment with What Framework?", we mentioned not to focus too much on non-farm data, but to look at the U.S. job market from a broader perspective. Overall, we believe that what is urgently needed now is to start and continuously cut interest rates, rather than a one-time large rate cut, which may also be the meaning behind the "preemptive" operation of Fed Governor Waller. As the rate cut approaches, what needs to be watched out for is the high volatility of the U.S. stock market in the short term.

After the cold surge in non-farm employment in July, August saw a mixed performance. Non-farm employment in August rebounded by 142,000, with the previous value revised down from 114,000 to 89,000, and the unemployment rate slightly decreased from 4.3% to 4.2%.

Looking at the reasons for unemployment, due to the impact of hurricanes, the unemployment rate in July unexpectedly rose by 0.2% to 4.3%, with temporary unemployment contributing about 60%. These workers returned to their jobs after the hurricane ended. In August, temporary unemployment had a negative contribution to the change in the unemployment rate.

Clues to the rebound in non-farm employment and the decrease in the unemployment rate in August include: weekly initial jobless claims remaining low, layoffs still at historical lows, the layoff rate in July slightly rising to 1.1% but still below pre-pandemic levels. After Biden signed a new executive order on June 4 regarding illegal immigration control at the U.S.-Mexico border, the influx of immigrants into competitive positions weakened the upward pressure on the unemployment rate.

Looking at the industry, this period's addition of non-farm employment, as well as the JOLTS employment in July, both show significant improvements in the leisure and hospitality industry and the construction industry compared to previous values.

The Fed racing against time. Behind the non-farm data, what the market is most concerned about may be its implications for monetary policy. We believe that a small, quick rate cut may be a better model for Fed policy, and a 25bp rate cut in September is still the most likely scenario: on the one hand, aside from the "zigzagging" non-farm employment, looking at the job vacancy/unemployment indicators that better capture the tightness of the U.S. job market, it is possible that we are currently at a critical juncture of tightening. Once the market continues to slow down, the risk of unemployment rate accelerating upwards will greatly increase, so the Fed does need to cut rates as soon as possible to address the negative inertia of the economy However, from the overall state of the employment market, the current recession risk is controllable. Instead, there may be concerns about the significant unexpected rate cuts stimulating sticky inflation.

Historically, is it abnormal for the non-farm payroll data to cause such large fluctuations in the market? How long will this last?

Firstly, different types of assets have varying sensitivity to non-farm payroll data before and after rate cuts.

The closer to a rate cut, the more sensitive the reaction of US stocks and bonds to non-farm payroll data: Taking the S&P 500 as an example, in the past 8 rate cut cycles, the average amplitude on the last non-farm payroll day before the first rate cut was 1.8%, the highest in the 12 months before and after the first rate cut.

The sensitivity of the US dollar and gold to non-farm payroll data does not significantly increase as the rate cut approaches: For the US dollar, in the past 7 rate cut cycles, the average amplitude on the last non-farm payroll day before the first rate cut was 1.0%, the second highest in the 12 months before and after the first rate cut, with the highest value occurring on the fourth last non-farm payroll day before the first rate cut.

Secondly, after the first rate cut, the market's high sensitivity to non-farm payroll data will continue for another 2-3 months.

Almost all types of assets will experience a significant decrease in amplitude on the first non-farm payroll day after the first rate cut compared to the last non-farm payroll day before the cut, but the high amplitude on non-farm payroll days often persists for 2-3 months. The average amplitudes of the S&P 500, 10-year US Treasury bonds, and the US Dollar Index return to normal on the second non-farm payroll day after the first rate cut, while gold returns to normal on the third non-farm payroll day.

Risk Warning: Overseas monetary policy may exceed expectations, as well as geopolitical factors.

Author: Minsheng Macro Taochuan Team, Source: Chuan Yue Global Macro (ID: gh_fa80a5ed2401), Original Title: "The 'Struggle' of August Non-Farm Payrolls"