Zhongjin: U.S. non-farm payrolls in June exceeded expectations, expected to cut interest rates in September.
Zhongjin released a research report stating that the better than expected non-farm payroll data in June indicates that the US labor market is still strong and the economic fundamentals are not bad.
Zhongjin released a research report stating that the better-than-expected non-farm payroll data in June indicates that the US labor market is still strong, and the economic fundamentals are not bad. After the non-farm data exceeded expectations, the current market expects a 93% probability of unchanged interest rates in July, and still expects rate cuts to begin in September, with two cuts expected within the year. After the Federal Reserve cuts interest rates and passes the tax reduction plan, it may restart the US credit cycle in the fourth quarter. The bank suggests paying attention to the possibility of a slight strengthening of the US dollar and outperformance of US stocks in the fourth quarter.
The main points of Zhongjin are as follows:
The data this time was better than expected in many aspects: Non-farm payrolls in June increased by 147,000, higher than the expected 106,000, with the value for May revised from 139,000 to 144,000, and for April revised from 147,000 to 158,000. The unemployment rate was 4.1%, significantly lower than the expected 4.3% and the previous value of 4.2%. The labor force participation rate fell to 62.3%, slightly lower than the expected and previous value of 62.4%. Hourly earnings rose by 0.2% month-on-month, lower than the expected 0.3% and the previous value of 0.4%; and rose by 3.7% year-on-year, lower than the expected 3.8% and the previous value of 3.9%.
Employment increases, unemployment decreases, but wages have not risen yet, so if this data is not "perfect", it is at least close to being "almost perfect". This is in stark contrast to the significantly lower-than-expected ADP employment data released yesterday. As a result, after the data was released, US bond yields temporarily surged by nearly 10 basis points to 4.36%, the US dollar strengthened, and gold prices fell.
The better-than-expected non-farm payroll data in June indicates that the US labor market is still strong, and the economic fundamentals are not bad. However, looking closely, excluding the 66,000 jobs added by the government sector, the private sector reduced employment by 63,000 compared to the previous month. What does this mean? It means that the overall trend is weakening, but not so bad. It indicates that rate cuts will happen, but not as quickly as expected in July in the past few days.
Recently, Federal Reserve Board members Powell and Bowman both expressed support for rate cuts in July, leading to an increased market bet on the timing of the rate cuts being brought forward to July. However, after the non-farm data exceeded expectations, the current market expects a 93% probability of unchanged interest rates in July, and still expect rate cuts to begin in September, with two cuts expected within the year.
Previously, the bank had been warning that if the market expected the Fed to be unable to cut interest rates within the year, tariff reductions would actually increase the probability of the Fed cutting interest rates within the year. The core reason is that the Fed already needed to cut rates (the real interest rate of 1.78% is 0.78 percentage points higher than the natural rate of 1.0%), but the uncertainty caused by tariffs made it hesitant to do so. Now that this uncertainty is gradually being resolved, rate cuts are possible. But July is a bit tight, because tariff exemptions will only be decided on July 9 and August 12, and inflation is expected to experience its largest increase within the year in July and August, so from this perspective, September, specifically the fourth quarter, is more likely.
In this situation, the recent rapid decline in long-term US bond yields may be a bit overdone. In addition, if the big beautiful bill is passed, there will be a demand for issuing around $1 trillion in bonds in July-September, and the temporary rise in inflation could cause rates to rise, but after this rise, there will be further opportunities for reallocation. US stocks are similar, with expectations relatively high at this point, and there are still several hurdles to overcome in the third quarter. However, if there is volatility, both US bonds and stocks present reallocation opportunities, and there is still no need to be pessimistic.