Huachuang Securities: may not need to start with a 50 basis point rate cut.

Huachuang Securities released a review of the August non-farm data. The team believes that the August non-farm data was weak but not collapsing, not as ideal, but did not deviate from the path of a soft landing. As for the speech of Federal Reserve Board member Wall, the team believes that either the Fed may not have as much confidence in a soft landing in the future employment market, or they are trying to appease the market and stabilize expectations, indicating that the Fed is consciously and capable of timely curbing the risk of recession. In terms of asset performance, the market seems to lean towards the former possibility. Summary of research report: August Non-Farm Employment: Weak but not collapsing, not as ideal, but not deviating from the path of a soft landing 1. Total employment: Rose slightly but the weakening trend continues. In August, the new non-farm employment increased by 142,000, lower than the expected 165,000, and the data for the past two months was revised down by 86,000. On one hand, the average monthly increase in the past three months was 116,000, slightly lower than the "balance speed of employment creation" believed by Fed member Wall, but higher than the levels in the first half of 2001 and 2007 before the two recessionsmonthly employment growth was significantly lower than 100,000. On the other hand, the breadth of employment growth continued to decline, with the three-month employment diffusion index dropping from 52% to 49.8%, compared to 64.1% between 2015 and 2019. 2. Employment structure: Driven mainly by four industries, including education and healthcare services (+47,000, previously +55,000), leisure and hospitality (+46,000, previously +24,000), construction (+34,000, previously +13,000), and government (+34,000, previously +15,000). Dragging industries were retail (-11,000, previously -3,4000) and information (-7,000, previously -15,000) employment continued to decline; manufacturing employment (-24,000, previously +6,000) reversed from positive to negative, showing a significant decline. Employment in finance (+11,000, previously -1,000), professional and business services (+8,000, previously -13,000), transportation and warehousing (+7,900, previously +5,600), and wholesale (+4,900, previously +7,300) saw a slight increase. 3. Unemployment rate: Slightly fell from 4.3% to 4.2%, as expected 4.2%; labor participation rate was 62.7%, unchanged from the previous value, in line with expectations. The change in the unemployment rate was affected by the weather factors in July. Due to severe weather, the number of workers who did not work but had jobs and full-time workers who turned into part-time work decreased significantly. At the same time, the number of temporary unemployed decreased from 1.062 million to 0.872 million, a decrease of 190,000, contributing to a 0.11 percentage point decline in the unemployment rate. On the other hand, the slowdown in employment demand for youth and adult males led to labor force exit, leading to an increase in the unemployment rate, with 16-19 year olds contributing to a 0.06 percentage point increase. 4. The Sam rule was triggered for two consecutive months. The value increased from 0.53 last month to 0.57, above the threshold of 0.5. Looking ahead, even if the unemployment rate remains at 4.2% until the end of the year, the Sam rule will continue to be triggered. However, a 4.2% unemployment rate is not indicative of a recession. As Sam himself said, the Sam rule depends on the negative feedback loop in the employment market caused by weakening demand, but the rule itself cannot distinguish whether the rise in the unemployment rate is due to an increase in supply or a significant weakening in demand. The current situation is worth watching, and it suggests that the Fed needs to cut interest rates to guard against a slowdown in the labor market, but it cannot prove that the U.S. is already in a recession. 5. Hourly wage growth rebounded slightly, increasing from 0.3% to 0.4% on a monthly basis, as expected 0.3%; and from 3.6% to 3.8% year-on-year, as expected 3.7%. The rebound in hourly wage growth may not be sustainable and does not imply a risk of "stagflation" in the U.S. A cooling job market means that the trend of hourly wage growth is still downward, with monthly fluctuations possible. The industries that rebounded on a monthly basis this month mainly include transportation and warehousing, construction, and information, where the hourly wages fluctuate significantly on a monthly basis. Industries with low fluctuations and strong resilience did not rebound, such as professional business services and leisure hotels. Federal Reserve Board member Walls speech and rate cuts in September Following the release of the employment report, Federal Reserve Board member Wall delivered a speech. The speech was highly anticipated as it was close to the September meeting and was the last significant speech before the Fed officials entered the pre-silence period. The core points of the speech include: firstly, the view on the labor market, "continuing to soften but not deteriorate," indicating that the economy is not in recession or on the verge of one, and the Sam rule may not apply. Secondly, an explanation of the data-dependent principle, "relying on data, but not overreacting to any data point (including the latest data)." Thirdly, the outlook on monetary policy, "starting rate cuts in September and subsequent cuts will be done in a cautious manner; but remaining open to the extent and pace of rate cuts, and supporting faster and more substantial rate cuts if subsequent data shows significant deterioration in the labor market. "Wall's last public speech was on July 17, when he had some concerns about the downward trend in inflation, was cautiously optimistic about the labor market, and believed that rate cuts in September, November, or December were not critical unless there were significant economic impacts during that period. We understand from Wall's speech that there are two implications: firstly, "employment continues to soften but not worsen, do not overreact to a single data point," implying a high probability of a 25bp rate cut in September. Secondly, "expectations for subsequent rate cuts to be done cautiously, but remaining open to the extent and pace of cuts," given Wall's hawkish image (advocating for quick and substantial rate hikes by 2022), this expression indicates that either the Fed may not have as much confidence in a soft landing in the future employment market, or they are trying to appease the market and stabilize expectations, showing that the Fed is conscious and capable of timely curbing the risk of a recession. From the perspective of asset performance, the market seems to lean towards the former possibility. Risk warning: Unexpected changes in the U.S. employment situation.