Huachuang Securities: The vacuum period of employment data may prompt the Fed to pause rate cuts in December.

Huachuang Securities released a research report stating that the September US non-farm data is a job report with "marginal improvement in overall volume, but structural flaws still exist". Overall, compared to July and August, there has been some marginal improvement. However, considering other data comprehensively, the employment situation may not have continued to improve since October. The firm pointed out that the vacuum period in employment data may prompt the Federal Reserve to pause rate cuts in December; however, if there is no rate cut in December, there may still be rate cuts at the beginning of next year. Based on the current employment and inflation situation, the pace is not yet at a point where the Federal Reserve can maintain a longer pause in rate cuts; in the medium term, the direction of rate cuts next year remains clear. Key points of Huachuang Securities: Summary of September non-farm data 1. New non-farm jobs rebounded and exceeded expectations. The new non-farm jobs were 119,000, higher than the expected 50,000. The July data was revised down from 79,000 to 72,000, and the August data was revised down from 22,000 to -0.4 million. Employment growth was mainly concentrated in two industries: education and health services (+59,000, previously +47,000) and leisure and hospitality (+47,000, previously +32,000), accounting for about 90% of total new job growth; followed by government (+22,000, previously -22,000), construction (+19,000, previously -14,000), wholesale and retail. Employment in manufacturing, professional, and business services declined. 2. Unemployment rate exceeded expectations. The unemployment rate was recorded at 4.4% (4.44%), higher than the expected and previous 4.3% (4.324%). The increase in the unemployment rate exceeded expectations mainly due to an increase in labor force supply: the labor force participation rate increased by 0.1 percentage point to 62.4%, higher than the expected 62.3%, with 251,000 new jobs according to the household survey and a labor force supply growth of 472,000. 3. Wage growth slightly lower than expected. Hourly wages increased by 0.2% month-on-month, below the expected 0.3% and the previous 0.4%, with the annualized change in the past 6 months dropping from 3.8% to 3.6%. Year-on-year wage growth was 3.8%, in line with expectations of 3.7% and previous 3.8%. Average weekly hours remained at 34.2 hours, still at a low level since 2015. Weekly wages increased by 0.2%. 4. Market expectations for rate cuts have warmed slightly. After the data was released, the probability of a rate cut in December priced by the futures market increased from 29.3% to 34.9%, and the number of rate cuts for next year increased from 3.33 times to 3.64 times. Employment since October may continue to be weak, but not stagnating The September non-farm data is a job report with "marginal improvement in overall volume, but structural flaws still exist". Overall, compared to July and August, there has been some marginal improvement. The positive aspect is that 1) the number of non-farm jobs rebounded significantly and exceeded market expectations, and since the data collection time was later, the initial survey response rate reached 80.2% (average of around 62% for the first 8 months of this year), with subsequent revisions expected to be small; 2) the unemployment rate rose above expectations, but the main reason was the improvement in labor force supply, with a rise in labor force participation. The negative aspects are that 1) non-farm jobs were revised down in July and August, and after June, new non-farm jobs in August were revised down to a negative value again; 2) employment growth was mainly concentrated in two industries, education and health services, and leisure and hospitality accounting for about 90% of total new job growth. 3) Wage growth was slightly lower than expected. However, the September non-farm data is also an "outdated" report, and considering other data comprehensively, the employment situation may not have continued to improve since October. Firstly, although the initial claims for unemployment benefits have remained between 220,000-230,000 since October, a decrease from August and September, the number of continuing claims for unemployment benefits has been rising. Secondly, the number of new jobs according to the ADP measure in October rose compared to August and September but remained at a low level of less than 50,000. Thirdly, vacancy data from Indeed continues to decline. The vacuum period in employment data may prompt the Federal Reserve to pause rate cuts in December Market expectations for a rate cut in December have cooled down twice in the past month: the first time was after the October FOMC meeting when the probability of a rate cut dropped from close to 100% to around 70%. At that time, Powell stated that a rate cut in December was "by no means a done deal - far from it" and "policy has no preset path". The second time was since mid-November when the probability of a rate cut dropped from around 70% to below 40%, with some Fed officials expressing a tendency not to cut rates due to "inflation concerns". From November 10 to the present, 14 Fed officials have publicly stated their positions, with 7 inclining not to cut rates (5 of which are voters), 5 being neutral (1 of which is a voter), and 2 leaning towards cutting rates (both voters). Risk factors: uncertainties in tariff policies; risks of higher US inflation and lower employment. In fact, the inflation reading in October was lower than market expectations, and we also believe that it is unlikely to rise further, probably staying around 3%. Excluding the impact of tariffs, inflation may be below 2.5%. Combined with observations that the employment situation has not shown sustained improvement since October, the Fed could continue with rate cuts in December. We believe that some Fed officials are not inclined to cut rates in December, and more factors to consider include the lack of the latest official non-farm report making them cautious in the short term, and inflation pressures may not be that high. Due to the impact of the government shutdown, the US Department of Labor stated that there will be no release of the October non-farm data, with the November non-farm data to be released on December 16, later than the December 10 FOMC meeting date, making the September non-farm data the only official employment data that the Fed can refer to before the December meeting. Considering the statements of Fed officials and market pricing, it is unlikely that there will be a rate cut in December. However, if there is no rate cut in December, there may still be rate cuts at the beginning of next year (the market expects rate cuts to continue in January next year). Based on the current employment and inflation situation, the pace is not yet at a point where the Fed can maintain a longer pause in rate cuts. Only when the employment data stabilizes for several months can the Fed potentially lengthen the interval for rate cuts to gradually approach the neutral interest rate. In the medium term, the direction of rate cuts next year remains clear, with the market estimating the neutral nominal policy rate in the US to be around 3-3.25%; the HLW model predicts a natural rate of 1.37% for Q2 of this year in the US, adding 2% inflation, giving an estimate of 3.37%, meaning the Fed should still have around 3 rate cuts of space. Risk factors: US employment and inflation data exceeding expectations.