Huachuang Securities: Employment data supports the Fed to remain on hold

According to Smart Finance APP, Huachuang Securities released a research report stating that employment data supports the Federal Reserve in maintaining its current stance. For the Fed, solid employment is a foundational assumption for shifting its focus and decision-making priority towards inflation. On this basis, differing tolerances for inflation have increased internal divisions within the Fed. The sustained cooling of employment over the past two months, shifting to a “weak but not collapsing” trend, supports the rationale for maintaining the status quo and waiting to observe further declines in inflation, which also helps bridge internal divisions. Currently, it is still inclined to believe that the Fed can keep rates unchanged this year, and there is not enough justification for a “preventive rate hike” similar to 1997.

The main views of Huachuang Securities are as follows:

Brief Description of July Nonfarm Payrolls Data

1. The number of new nonfarm jobs decreased by 23,000, with an expectation of 80,000, and the combined figures for the previous two months were revised down by 103,000. Employment growth mainly came from education and health services (+25,000, previous +54,000), construction (+22,000, previous +5,000), and professional and business services (+18,000, previous +34,000). Four industries experienced job contraction: government (-53,000, previous -10,000), leisure and hospitality (-40,000, previous -43,000), retail, and finance.

2. The unemployment rate fell from 4.2% to 4.1%, with an expected 4.2%. The labor participation rate decreased from 61.5% to 61.4%, with an expected 61.6%. In the household survey, the labor force decreased by 264,000, employment dropped by 87,000, unemployment fell by 178,000, and the non-labor force increased by 381,000.

3. Private sector hourly wages rose 0.1% MoM, with an expectation of 0.3% and a previous value of 0.3%; YoY growth was 3.2%, expected 3.5%, previous 3.4%. Average weekly hours remained at 34.3 hours. Weekly wages grew 0.1% MoM.

4. Market expectations for rate hikes cooled, with the probability of a rate hike in the Federal Funds futures market dropping from 57% to 44% for September. The expected number of rate hikes this year fell from 1.35 to 1.13.

Comprehensive Cooling of Employment Data

First, in terms of total numbers, new nonfarm employment unexpectedly turned negative, and the previous two months’ data was significantly revised downward. The average new nonfarm jobs over the past three months fell from 77,000 to 20,000, at the lower boundary of break-even employment growth estimated by overseas institutions. Structurally, industry employment was also lackluster. Although this month's new nonfarm jobs were heavily dragged down by local government education (-50,000, previous -11,600), private sector job growth was also weak, with contractions in leisure and hospitality, retail, and finance— the first two possibly related to the fading of World Cup temporary hiring. Only construction, driven by AI-related development, recorded relatively strong job growth.

Second, the unemployment rate continued to decline more than expected, but the main reason was still not “more people found jobs,” but “more people left the labor market.” While the participation rate for the prime age group (25-54 years) rebounded slightly, the participation rates for teenagers and seniors continued to decline markedly. Since the beginning of this year, a sustained drop in the labor participation rate has weakened the signaling power of the unemployment rate for the job market. An alternative observation metric is the employment-to-population ratio, which has decreased by approximately 0.8 percentage points this year, compared to only a 0.3 percentage point drop for the entirety of last year.

Third, matching the weak job growth, the month-on-month wage growth was below expectations, and the year-on-year growth rate dropped to a new low since June 2021. Medium- and long-term inflation expectation de-anchoring and the inflation-wage spiral are the core transmission mechanisms for temporary price shocks turning into persistent inflation. Currently, medium- and long-term inflation expectations are stable, wage growth continues to decline year-on-year, and the risk of endogenous secondary inflation is relatively low.

Employment Data Supports the Fed Maintaining Status Quo

In July, nonfarm employment continued to cool comprehensively, further confirming earlier judgments: the significant employment rebound since the start of the year is not sustainable, and the employment overheating narrative has been further “disproved.”

For the Federal Reserve, solid employment forms the foundational assumption for shifting its focus and decision-making toward inflation; on this basis, variations in inflation tolerance have widened internal divisions within the Fed. The recent cooling of employment, trending toward “weak but not collapsing,” supports the rationale for holding steady and waiting to see if inflation continues to subside, which is also conducive to reconciling internal disagreements. Currently, there remains a tendency to believe the Fed will keep rates unchanged this year, as the justification for a “preventive rate hike” similar to 1997 is not compelling.

For the markets, regarding U.S. equities, the easing of rate hike pressures means that risks from macro policy headwinds are continuing to dissipate, and there is a marginal improvement in macro risk appetite. As for U.S. Treasuries, this helps to moderate upward pressure on real rates. If inflation does not exceed expectations moving forward, both short- and long-term U.S. Treasury yields may already be at a cyclical top, with a low probability of further significant increases.

Risk Warnings: Uncertainties related to geopolitical conflicts and AI industry trends.