GF Securities predicts that the Federal Reserve will cut interest rates in September, cut rates twice within this year, each time by about 25 basis points.

GF Securities published a research report reviewing the US August non-farm data, and the team believes that the significant rise in temporary unemployment in July, including disturbances such as weather, may be repaired to some extent in the August data. The team maintains the judgment that the Federal Reserve will start cutting interest rates in September, with about 2 rate cuts during the year, each by 25bp. The next important point will be the Federal Reserve interest rate meeting on September 17-18. If the rate cut window by the Federal Reserve is realized as expected, it is worth observing whether there will be a round of policy resonance in the non-US markets. The following is a summary of the research report: First, according to the US Department of Labor data on September 6, the US August non-farm data showed some recovery compared to July, but it was slightly lower than market expectations. The August non-farm increase was 142,000, with market expectations at 165,000, and the previous value was 89,000 (the report revised the July and June non-farm increases to 89,000 and 118,000, respectively). In terms of employment breadth, the employment diffusion index for August returned to above the 50 level at 53.2%, compared to 47.8% previously (a number greater than 50 indicates expanding hiring by more than shrinking). The average value for 2023 was 59.4%. Second, the industry structure of August non-farm data was better than July, with the health insurance industry contributing 62% of the new jobs in that month. The breadth of August improved slightly, with the leisure and hotel industry, health care services, and construction being the main contributors, adding 46,000, 44,000, and 34,000 jobs respectively. The industries that dragged included durable goods manufacturing, retail trade, and information services, with decreases of 25,000, 11,000, and 7,000 jobs respectively. Manufacturing employment turned from positive to negative again, with an addition of 24,000 jobs. Government sector added slightly to 24,000 jobs, compared to 15,000 previously, with a slight rebound in local government employment from the previous strength. Overall, the data is in line with our previous judgment - after the extremely low non-farm data in July, we pointed out that the significant increase in temporary unemployment in July, including disturbances such as weather, might lead to a certain degree of recovery in August data. Third, the household survey data released at the same time showed a slight recovery compared to July. The US unemployment rate (U3) in August fell from 4.25% to 4.22%, with a decrease of 190,000 in temporary unemployment, leading to a -0.1% impact on the unemployment rate, and an increase of 68,000 in new entrants, leading to an impact of +0.05% on the unemployment rate. In other words, there was no continuation in the increase in the unemployment rate due to temporary factors (weather) in July, a point we had already hinted at in the previous month's review. The slightly rise in the number of permanently unemployed individuals shows overall employment pressure moving upward but still manageable. In terms of age, the unemployment rate for the 16-19 age group increased by 1.7%, while the rate for the population over 20 decreased by 0.1%. In simple terms, the increase in unemployment rate for young labor forces reflects the cooling of employment demand, while the slight increase in permanently unemployed individuals shows a marginal increase in companies' willingness to lay off workers, although the extent is currently limited. Fourth, according to the Okun's Law, if the average unemployment rate over the past 3 months is 0.5 points or more higher than the lowest average over the past year, the probability of recession is higher. The average unemployment rate from June to August was 4.2%, while the lowest point over the past 12 months was 3.6%, resulting in a difference of 0.57 points. However, it should be noted that this round of unemployment rate increase should not be viewed through the lens of a traditional economic cycle. First, as pointed out in the previous report on "US July Non-farm Data and Okun's Law," the post-pandemic employment population structure in the US has undergone significant changes, with a large number of immigrants entering the country leading to a significant increase in the labor force population, and the increased tolerance for remote work has also led to a significant rise in disabled individuals seeking employment. Okun himself has also emphasized this point. Second, the historic expansion of the fiscal deficit during this round has had a larger economic impact. The unemployment rate of 3.5% in July 2023 was the lowest level since June 1969, indicating an overheated employment market under the influence of post-pandemic stacked with fiscal subsidies. The current unemployment rate returning from the ultra-low level to the natural rate of unemployment (4.4%) is similar to the increase in the number of continued claims for unemployment benefits, which has increased but has not triggered a recession. Fifth, the wage growth in the US in August slightly exceeded expectations. Hourly wages increased by 3.8% year-on-year, higher than the expected 3.7% and the previous value of 3.6%. We have several points to add on this data: first, the wage growth is currently at historically high levels, overall trending downwards, with the gradual narrowing of the employment supply-demand gap leading to a slow decline in wage growth. This month's data shows a bounce back in the middle, indicating a clear resilience; second, the resilient wage growth supports the consumption willingness and ability of residents, especially the lower- and middle-income groups; third, with inflation continuing to decline, real income growth is on the rise; fourth, US labor productivity data showed a significant increase compared to 2022, leading to a decline in unit labor costs, providing support for corporate profits in the background of wage increases. Sixth, on the day the data was released, Federal Reserve Governor Wall and New York Fed President Williams provided key guidance on future monetary policy. Wall believes that the economy is currently solid overall, and there is no evidence that the economy is in recession or heading towards one. Therefore, Wall believes that signs of economic and labor market cooling should be interpreted as softening rather than deteriorating. We understand that Wall's speech is generally hawkish - although he also mentioned that if the data worsens, he would support continuous rate cuts, but at the moment he supports cautious rate cuts. Williams, in an activity with the Council on Foreign Relations on the same day, mentioned that monetary policy will gradually transition to neutral over time, implying that the Fed's rate cut in September should be cautiously done. In addition, Williams also predicts that GDP growth for this year may be between 2-2.5%, and the unemployment rate at the end of the year may be around 4.5%, indicating that modest growth and gradual rise in unemployment rate will remain the baseline scenario. Wall and Williams' speeches overall align with the general...Our judgement on the US economy experiencing a soft landing, we maintain our forecast that the Federal Reserve will start cutting interest rates in September, with approximately 2 rate cuts within the year, each cut being 25 basis points.7. After the release of employment data, Fed Watch data shows that the probability of the Fed lowering interest rates by 25bp and 50bp in September is 70% and 30% respectively, with previous values at 60% and 40%. The probabilities of a 25bp and 50bp rate cut in November are 27% and 55% respectively, with previous values at 33% and 49%. In terms of asset reaction, there was little change in the 10-year US Treasury yield, which dropped by 2bp to 3.70%. The US dollar index slightly rose to 101.177. For the overvalued US stock market, the lack of confirmation of a larger rate cut is considered negative, leading to significant drops in the three major US stock indices. Gold initially rose, then fell, ultimately closing slightly down by 0.77%. The next important point is the Federal Reserve meeting on September 17-18. If the Fed's rate cut window is realized as expected, it is worth observing whether there will be a cycle of policy resonance in the non-US markets.