Guosheng: The February non-agricultural employment is like "late spring cold", while the Federal Reserve is "stuck in the middle".

1. The US non-farm payroll in February fell significantly below expectations, with a slight increase in the unemployment rate. > Overall Performance: In February, the US non-farm payrolls decreased by 92,000, far below the expected value of 55,000. The unemployment rate in February was 4.4%, higher than the expected and previous value of 4.3%. The labor force participation rate in February was 62.0%, lower than the expected and previous value of 62.5%. The average weekly hours in February were 34.3 hours, consistent with the expected and previous value of 34.3 hours. The average hourly wages in February increased by 0.4% from the previous month, higher than the expected 0.3%. Overall, the non-farm payroll in February was significantly lower than market expectations, but wage growth still maintained some resilience. There were clear signs of a slowdown in employment momentum, reflecting the noise in January non-farm data and the ongoing slackening in the labor market. > Sector Performance: The government sector (-6,000) continued to cut jobs; most industries in the private sector also saw a contraction: Education and healthcare (-34,000) and leisure and hospitality (-27,000) experienced the largest declines in employment for the month. Additionally, the manufacturing sector (-12,000), construction (-11,000), transportation and warehousing (-11,000), and information sector (-11,000) all showed varying degrees of decrease. Only a few industries maintained growth, with the finance sector (+10,000) and wholesale sector (+6,000) seeing minor increases, while retail (+2.3,000) and utilities (+1.3,000) also saw slight increases. The decrease in February non-farm payrolls was not only due to a decline in the education and healthcare industry, but it was more broad-based, with various reasons contributing to it. The underlying issue is the continued fragility of the labor market. 2. Following the release of the non-farm payroll report, US stocks and the US dollar fell, while US bonds and gold rose, and expectations for a Fed rate cut increased. > Asset Class Performance: Following the release of the non-farm payroll report, US stocks, the US dollar, and US bond yields all fell, while gold rose. As of the close on 03/06, the S&P 500, Nasdaq, and Dow Jones indexes fell by 1.33%, 1.59%, and 0.95% respectively, while the 10-year US bond yield decreased by 0.77 basis points to 4.13%. The US dollar index dropped by 0.09% to 98.96, and spot gold rose by 1.64% to $5168 per ounce. > Changes in Rate Cut Expectations: After the non-farm payroll report, there was a slight increase in market expectations for a Fed rate cut. The implied probability of a rate cut in June from rate futures increased from 37.8% to 56.7%, while the expected timing of the first rate cut remained in September (1 cut to 1.2 cuts), and the total number of rate cuts in 2026 increased from 1.58 cuts to 1.76 cuts. 3. There are four main reasons for the significant decline in the non-farm payroll this time, and a loose policy window is expected in the second half of the year. > Reasons for the Decline in Non-Farm Payrolls: The main reasons for the significant decline in non-farm payrolls this time are primarily fourfold: 1) The healthcare industry, which has been supporting non-farm payrolls since 2025, performed poorly this time, mainly due to the impact of the strike by over 30,000 staff at Kaiser Permanente since the end of January; 2) The winter storm and extreme cold weather in early February in the US caused temporary disruption in labor activities in weather-sensitive industries such as construction, transportation, warehousing, and leisure and hospitality; 3) Lay-offs by some internet companies and continuous job cuts in the government sector also weighed on employment; 4) The update of the enterprise life or death model in January technically strengthened the pro-cyclical nature of non-farm payrolls. Overall, the significant decline in non-farm payrolls was below market expectations, indicating that the US labor market remains fragile and the slackening process continues. > Outlook: Since 2026, the public statements of several Fed officials have been notably cautious, with the Fed Speak sentiment index rebounding from the beginning of the year. At the current juncture, considering that there are still existing service inflation stickiness and rising oil prices due to Middle East geopolitical tensions, along with signals of weakness in the labor market at this time, posing a challenging scenario for the Fed's dual mandate. The focus on the labor market will likely increase again in the first half of the year, with the Fed likely maintaining a wait-and-see approach in their upcoming monetary policy meetings to observe more data. However, for financial markets, the significant underperformance in non-farm payrolls this time, along with the January CPI figure also falling short of expectations (but core inflation still showing strength), is favorable for rate cut expectations. Continued caution: The real turning point in policy space is likely to occur after the change in Fed chairmanship in May. Following the completion of the handover of the chairmanship, if there is a marginal adjustment in the Fed's policy stance under Warsh's leadership, coupled with a gradual slowdown in economic momentum in the first half of the year, the space for rate cuts in the second half of the year may open up significantly. In our annual report "Weak Recovery and Rebalancing - Overseas Macro outlook for 2026", we stated that the fundamentals of the US economy in 2026 do not require a significant rate cut, but against the backdrop of the Fed chairmanship change in May and the midterm elections in November, the Fed's independence is being challenged. The current market expectation is for approximately 1.8 rate cuts for the full year of 2026, which aligns with economic fundamentals, but may not fully account for the cost of the Fed losing its independence. In addition to the rate cut path, the focus will also be on US dollar liquidity. In the absence of substantial balance sheet expansion in 2026, the basic liquidity of the US dollar is difficult to expand, and the US non-banking sector and offshore US dollar system may still face temporary liquidity risks, making it challenging for the volatility centers of assets such as Nasdaq and commodities to significantly downsize. Risk Warning: US economic and inflation risks, Fed monetary policy, geopolitical conflicts, etc., continue to exceed expectations.