Huachuang Securities comment on January non-farm payrolls: Tightening trades heating up again. It is expected that the first interest rate cut this year will be in June.

Huachuang Securities released a research report stating that, looking ahead in the later part of this year, considering the economic fundamentals are still relatively strong, especially with the household sector's balance sheets and cash flows remaining healthy, the probability of the US labor market weakening more than expected is low. In addition, coupled with the potential inflation risks brought about by Trump's policies, it is expected that the policy focus of the Federal Reserve will further lean towards inflation (currently more balanced). From the perspective of monetary policy rules, as long as inflation continues to improve, the Fed can continue to cut interest rates. However, the choice of timing for rate cuts may be delicate, with the expectation that the first rate cut of the year may occur in the second quarter (June). Key points from Huachuang Securities: January non-farm payrolls data: US labor market resilience remains strong 1. The resilience of new non-farm employment remains strong. Although new non-farm payrolls increased by 143,000, lower than the expected 175,000, there may be short-term disturbances affecting the data. Considering that the data for the previous two months was revised up by 100,000, the average monthly new job additions over the past three months have reached 237,000, the highest since April 2023. In addition, the three-month diffusion index measuring the broad-based growth in employment has also risen significantly to its highest level since February 2023. Overall, the demand in the US labor market remains relatively strong. In terms of major industries, new job additions were mainly concentrated in four industries: education and health services (+61,000, previously +82,000), retail trade (+34,300, previously +36,300), government sectors (+32,000, previously +34,000), and other services (+17,000, previously +9,000). 2. Unemployment rate declined and better than expected, dropping from 4.086% to 4.011%, with an expectation of 4.1%. Labor force participation rate was 62.6%, better than the previous figure and Bloomberg's expectation of 62.5%. The decline in the unemployment rate was mainly driven by a reduction in the number of people unemployed due to quitting, stable layoffs by companies, and a decrease in temporary lay-offs, each contributing to a decrease in the unemployment rate by approximately 0.03, 0.02, and 0.01 percentage points, respectively. 3. Average hourly earnings exceeded expectations on a month-on-month basis, rising by 0.5% compared to an expectation of 0.3% and a previous figure of 0.3%. The six-month annualized growth rate of average hourly earnings increased from 4% to 4.6%. The year-on-year growth rate of average hourly earnings was 4.1%, higher than the expected 3.8%, with the previous figure revised up from 3.9% to 4.1%. 4. Market tightening trading heats up again. Despite the overall strength of the non-farm data, coupled with the significant increase in Michigan consumer inflation expectations possibly influenced by Trump's tariff policies (1-year inflation expectations jumped from 3.3% to 4.3%), the market is still pricing in only one rate cut by the Federal Reserve this year. However, the timing of the fully absorbed first rate cut (100% probability of cut) has been pushed back from July to September, resulting in an implied upward adjustment in the policy rate path. US bond yields rose, the US dollar index increased, and the three major US stock indices all declined. Three details in the non-farm data: 1. Why did new non-farm employment fall short of expectations? It may have been mainly affected by temporary negative impacts brought about by cold weather, southern California wildfires, and an Oregon medical strike. The wildfires in southern California and severe cold weather occurred during the survey period for the data collection. Although officials stated that this would not have a discernible effect on national-level data, the observation by the institution indicated that the number of workers not working due to severe weather and those who transitioned from full-time to part-time work was significantly higher compared to normal periods in previous years. Additionally, according to BLS statistics, the number of strikes in the US increased from 5,000 to 9,800 in January, with the new strikes coming from the medical industry in Oregon, which started on January 10 (falling within the survey period for non-farm employment), involving 4,800 workers. 2. Why did average hourly earnings exceed expectations? The decrease in weekly hours of work due to cold weather may have led to a higher-than-expected increase in average hourly earnings. Average hourly earnings are not an actual survey value but a calculated value derived from the average weekly earnings divided by the weekly hours worked obtained from the survey. Weekly hours worked in January decreased from 34.2 hours to 34.1 hours, consistent with the levels during the COVID-19 pandemic in March 2020, marking the lowest level since 2011. If the weekly hours worked in January had remained at 34.2 hours, the month-on-month increase in hourly earnings would have been 0.2%. 3. Why did the labor force participation rate increase? The main reason for the increase was due to the US Department of Labor making revisions to household survey data based on annual population estimates from the US Census Bureau. This revision was significant, reflecting the latest methods and new information regarding international immigration in recent years. Compared to before the adjustment, this revision led to a 0.1 percentage point increase in the labor force participation rate and a 0.1 percentage point increase in the unemployment rate (the labor force participation and unemployment rates of the immigrant population were higher than that of the domestic population). In other words, if not for the revision, the labor force participation rate for January should have been 62.5%, and the unemployment rate should have been 3.9%. The re-estimation of the immigrant population also resolved a major puzzle in the US labor market last year, the "persistent divergence between employment numbers based on household survey and establishment survey methodologies," with the revised data having largely reconciled the discrepancy. Impact of the US labor market situation on the Federal Reserve's rate cut decisions Looking ahead later this year, given that the economic fundamentals remain relatively strong, particularly with the household sector's balance sheets and cash flows still healthy, the likelihood of the labor market weakening more than expected is low, coupled with the potential inflation risks brought about by Trump's policies, Huachuang Securities expects the Federal Reserve's policy focus to further lean towards inflation (currently more balanced). From the perspective of monetary policy rules, as long as inflation continues to improve, the Fed can continue to cut interest rates. However, the timing of rate cuts may be delicate, with the expectation that the first rate cut of the year may occur in the second quarter (June). Risk warning: Uncertainty in Trump's policies; US inflation exceeding expectations.