On August 2nd local time, the US Bureau of Labor Statistics released data showing that non farm employment increased by 114000 in July, up from 206000 previously; The unemployment rate rebounded to 4.3%, compared to the previous value of 4.1%, which was significantly lower than market expectations. Due to the overall cooling of non farm payroll data, market expectations for the Federal Reserve's interest rate path have significantly decreased. The number of interest rate cuts priced by the market has rebounded, with the magnitude of the September rate cut expanding from 25bp to 50bp, and the magnitude of the year's rate cut expanding from 75bp to 100bp. The probability of a 50bp rate cut in September has increased to 60%, and the probability of a 50bp rate cut in November has increased to 50%.
From the perspective of asset response, as of August 3rd, the yield of 10-year US Treasury bonds has fallen from 3.97% to 3.79%; The US dollar index fell from 105.13 to 103.466; The three major stock indexes in the US have all experienced a decline, with the SP500 index falling 1.84%, the Nasdaq index falling 2.43%, and the Dow Jones Industrial Average falling 1.51%. Gold first rose and then fell, ultimately closing with a slight decrease of 0.12%.
It is worth noting that against the backdrop of the weakening of the US dollar index, the exchange rate of RMB against the US dollar has risen significantly. On the evening of August 2nd, the RMB exchange rate continued its intraday rise and continued to expand. As of 23:30, the offshore RMB exchange rate was at 7.1461, breaking the 7.15 mark and rising more than a thousand points during the day. The onshore RMB exchange rate was reported at 7.1566, breaking the 7.16 mark and rebounding by over 800 points within the day. When the Chinese yuan continued to strengthen, the Japanese yen also broke several key levels one after another.
July US employment data cools across the board
The non farm payroll data for July in the United States shows that the job market has gradually returned to normal from an "overheated" state: the number of new jobs added was only 114000, far below the expected 175000, and at the same time, it has dropped significantly from the revised down previous value of 179000, indicating that the labor market is cooling down.
Structurally speaking, the main sources of new non farm payroll in July came from the construction and manufacturing industries, with 25000 and 1000 people respectively, an increase of 5000 and 10000 people compared to the previous month. The service industry and government departments were the main drag factors, with the service industry decreasing by 53000 people to 72000 people and the government departments decreasing by 26000 people from 43000 to 17000 people.
In addition, the unemployment rate rose from 4.1% in June to 4.3% in July, triggering a recession "alarm". Meanwhile, wage growth is also slowing down. In July, the growth rate of US wages declined on a month on month basis, with an average annual growth rate of 3.6% per hour, the smallest increase since May 2021 and the lowest level in over three years.
The macroeconomic team led by Chen Xing from Caitong Securities pointed out that the number of new non farm jobs added in the United States in July decreased compared to the previous month, with the unemployment rate rising by 0.2 percentage points to 4.3% and the year-on-year growth rate of hourly wages dropping to 3.6%. The decrease in new employment, the increase in unemployment rate, and the slowdown in wage growth all point to a comprehensive cooling of the US employment data for the month.
Chen Xing believes that the increase in frictional unemployment is the main reason for the higher unemployment rate in July. The labor force participation rate has increased in July, with an increase in the number of people actively looking for jobs, an increase in the number of unemployed people ending part-time jobs, and an increase in the number of people participating in part-time jobs due to economic reasons, or due to slower wage growth and reduced savings. Secondly, the education and healthcare industry and government employment have decreased, which has been the main support for new employment in the past few months. Finally, severe weather conditions may also cause some disturbance. The hurricane weather in July caused widespread power outages in Texas, USA, resulting in a decrease in average working hours in July. 461000 working people were unable to work, a level far ahead of the ten-year average for the same period, which may also have some impact on employment and job seeking.
There is little doubt that the Federal Reserve will cut interest rates in September, and the magnitude of interest rate cuts may increase within the year
The team led by Zhang Jingjing, Chief Macro Analyst at China Merchants Securities, believes that from various details, the July data fully reflects the weakening of the US labor market. Although there is little doubt about the September interest rate cut, whether it will continue to be cut remains to be seen. If the unemployment rate enters a rapid upward trend and is accompanied by a sustained significant adjustment in the US stock market, it is highly likely that the Federal Reserve will further cut interest rates in the fourth quarter.
Qin Tai, Chief Macro Analyst at Huajin Securities, stated that the significant cooling of US employment data in July could complicate the exchange rate environment if the trend continues in the future. If US employment continues to cool down in the coming months, it may increase the risk of inflation rising, or even make the Federal Reserve's decisions more indecisive, until consumer demand is eventually dragged down by wages after a longer period of transmission, and at that time the Federal Reserve will surely accelerate interest rate cuts.
The Chen Xing team believes that considering the overall slowdown in the expansion pace of the US labor market, coupled with the slowdown in hourly wage growth, it is expected to drive down service inflation. Therefore, the September interest rate cut is imminent, and the magnitude of interest rate cuts may increase within the year.
The team led by Chen Li, Chief Economist of Dongwu Securities, believes that the Federal Reserve is more concerned about the "dual risk" mission of employment inflation. In the July Federal Open Market Committee statement, policymakers shifted their wording from "highly concerned about inflation risks" to "; quot; Pay attention to the labor market Although inflation remains the key to reduction, Powell pointed out that the risks in the current labor market are real, and the unexpected deterioration of the labor market undoubtedly catalyzed the key factors for interest rate cuts. The cooling down of employment not only relies on one data point, but also requires a trend based decline. Focus on whether the core CPI and core PCE can continue the "good news" of the previous two months in the future.