Zhitong Financial APP learned that Minsheng Securities issued a research report saying that United States non-farm employment in September exceeded expectations, and the probability of slowing down the pace of interest rate cuts to 25bp in November quickly rose to nearly 100%. On the one hand, Powell said that the economy is still "solid", which is confirmed by the non-farm payrolls data in this period. On the other hand, the October non-farm payrolls data may be "flawed", so even if employment turns worse in October, the Fed may still choose to err on the side of caution and cut rates by 25bp.
The following is an abstract of the research report:
United States' larger-than-expected hot non-farm payrolls data did not "frighten" U.S. stocks, and it was inseparable from China's light. The non-farm payrolls data released last night basically dispelled the market's thoughts of a 50bp interest rate cut in November, but U.S. stocks still recorded a lot of gains, led by the Nasdaq, rising more than 1%. In addition to the gradual clarity of the "soft landing + easing" scenario, the market sentiment mobilized by Chinese assets during the holiday period also contributed to it. Looking ahead, in the United States, with the advancement of interest rate cuts, the impact of non-farm payrolls on the market will gradually stabilize, while for the Chinese market after the holiday, we believe that the impact of non-farm payrolls data is limited, and policy expectations and domestic incremental funds are still the main driving forces of the market.
United States non-farm payrolls exceeded expectations in September, and the probability of a slowdown to 25bp in November quickly rose to nearly 100%. Nonfarm payrolls were added by 254,000 in September, significantly higher than the forecast of 150,000, and the combined figures for July and August were revised upwards by 72,000. After the release of the data, the probability of a 25bp rate cut in November rose from 69% to 95%, and the probability of a 50bp rate cut fell to less than 5%.
By industry, education and medical care, leisure and hospitality added 81,000 and 78,000 jobs respectively in September, accounting for 63% of the total number of new jobs in September. The retail and manufacturing sectors, which performed poorly in August, improved markedly in September. It reflects the boosting effect of the back-to-school season, the peak summer service consumption season, and the start of the interest rate cut cycle on employment.
The unemployment rate unexpectedly fell, and the "Sam Rule" recession alarm was lifted. In terms of keeping two decimal places, the unemployment rate fell to 4.05% in September from 4.22% in the previous month, and the "Sam Rule" recession indicator recorded 0.48%, falling back into the "safe" range of 0.5%. Broken down by unemployment rate drivers, the denominator end: the labor force participation rate continued to be flat in the previous value and remained basically stable in the past year. On the numerator side, voluntarily retired, those who returned to the labor market, new entrants, and the permanent unemployed all contributed negatively to the unemployment rate in September, and only the temporary unemployed contributed a small positive contribution to the unemployment rate.
At present, the United States is in a state of "low hiring, low layoffs". According to the JOLTS survey data in August, the layoff rate, voluntary turnover rate, and employment rate all decreased at the same time, and all of them were lower than the average in 2019. This reflects that employers in the United States are currently reducing their hiring, but fortunately they are still not laying off employees. Non-farm payrolls rose to 4.0% year-on-year in September, higher than market expectations of 3.8%, with most of the 13 sub-sectors seeing a cooling of wage growth, with only construction, manufacturing, professional and business services, leisure and hospitality rising in wages. In the current state of "low hiring, low layoffs", wage growth will not become a hidden danger of reflation.
Market expectations for a 25bp rate cut in November have risen sharply to close to 100%. On the one hand, Powell said that the economy is still "solid", which is confirmed by the non-farm payrolls data in this period. With interest rate cuts on the ground, corporate hiring intentions are expected to stabilize, and there is less risk of a stalled surge in the United States unemployment rate. Services PMI and consumption data remain resilient. Although the manufacturing PMI continues to be sluggish, it is partly due to uncertainty about future policies. It is expected that after the election, the manufacturing industry is expected to stabilize and rebound as interest rates fall. On 30 September, Fed Chair Jerome Powell said that the economy remains in a "solid shape" and that the Fed is "not in a hurry." This statement is consistent with the September FOMC dot plot, which said that November and December will slow the pace and fall by 25 basis points each.
On the other hand, the October non-farm payrolls data may be "flawed", so even if employment turns worse in October, the Fed may still choose to err on the side of caution and cut rates by 25bp. The near-term port strikes are not expected to affect the October non-farm payrolls data. A large-scale strike broke out at United States ports on October 1, and an agreement was reached on October 3 to suspend the strike. The reference week for the United States Bureau of Labor's Household Employment Survey (CPS survey, unemployment rate data) in October 2024 is October 6~12; The reference period for the business survey (CES survey, which publishes new nonfarm payrolls) is the wage period that includes October 12. As a result, the strike did not affect the ILO's employment survey period in October. Hurricane Helenie could make October's employment data worse. Hurricane Helenie made landfall in United States on September 26 and has not yet ended. The latest initial jobless claims rose more than expected to 225,000, which may also be affected by this. The hurricane has the potential to cause a "upset" for the October NFP, repeating the July NFP "upset" due to Hurricane Beryl. The "flawed" data makes even the non-farm payrolls in October bad enough to be a reason for a 50bp rate cut in November.
The impact of non-farm payrolls on asset prices is reduced, and a consensus on a soft landing may be only one step away. Historically, employment data will remain the focus after the start of the interest rate cut cycle, but as the interest rate cut cycle deepens, the sensitivity of various assets to employment data will decrease. At the same time, in the process, the market's expectations for interest rate cuts will also be gradually revised: in general, about 3 months after the start of the rate cut cycle, the market has a decision on whether there will be a "soft landing" or a "recession".
The current consensus on the expectation of a soft landing is gradually forming, and there may be only one jobs report left. According to the information of the September FOMC interest rate meeting, the non-farm payrolls in July actually reached the "threshold" of the Fed's interest rate cuts, but the non-farm payrolls data in August and September were stable, and the impact of the non-farm payrolls data on asset prices gradually decreased.
If the market expects a correction to the "soft landing" consensus, there is still a lot of room for adjustment. The market is currently expecting the magnitude of the current round of interest rate cut cycle to be more than 200bp, which is actually more aggressive than the previous soft landing rate cut cycle: in 1995, 1998, and 2019, the final rate cut was only 75bp. Considering that the current market expectation is in a state of "neither soft landing expectation nor recession expectation", if the subsequent economy does have a soft landing, and the current market greatly overestimates the magnitude of future interest rate cuts, then the US Treasury interest rate will have renewed upward pressure, and the US stock market will perform better.