Soochow: In July, the U.S. non-farm payrolls unexpectedly turned negative, and there is still significant room for a decrease in interest rate hike expectations.

Soochow released a research report stating that in July, the United States unexpectedly reported a decline in non-farm employment. Looking ahead, as the short-term impulses brought by fiscal policies and the World Cup gradually subside, along with the delayed impact of tightening financial conditions becoming apparent, the U.S. economy in Q3 2026 may experience a phase of cooling. The bank expects that the upcoming key data, including July CPI, August CPI, and the annual adjustment of non-farm employment, will continue to weaken expectations for Federal Reserve interest rate hikes, driving down U.S. Treasury rates and the dollar index while providing support for gold prices. Key Points July Non-Farm Employment: Unexpected decline in job creation, unemployment rate continues to fall. In July, the U.S. non-farm employment saw a decrease of 23,000 jobs, against an expectation of 80,000, and the previous value was revised down from 57,000 to 20,000, with a total downward revision of 103,000 jobs over the past two months, leading to a three-month average drop from 77,000 to 20,000. Similar to the July ADP private employment figures, U.S. non-farm employment concluded its "brief resurgence" and returned to a downward trajectory. Meanwhile, the unemployment rate declined to 4.1%, below expectations and the previous value of 4.2%. Structurally, as in the previous month, the decrease in unemployment was primarily due to a contraction in labor supply. After the data release, despite the unexpected decline in non-farm employment, the market did not factor in recession due to the surprising drop in unemployment. The narrative remained focused on accommodative monetary policy (cooling interest rate hike expectations): gold, U.S. stocks, and copper prices rose, while the dollar index and Treasury rates fell. The implied odds of a September Fed rate hike dropped from 57% prior to the data release to 44%, with the expectation for total rate hikes for the year reduced from 1.35 to 1.15. Consequently, U.S. Treasury rates and the dollar index fell, while gold and commodity prices rose. Employment Structure: The cooling of job demand is a widespread phenomenon rather than structural. On the corporate side, job creation in the goods-producing sector added 25,000, with 22,000 from the construction industry; the service sector added 50,000 jobs, with sectors such as trade and transportation, financial activities, and leisure and hospitality all experiencing negative growth month-on-month. In terms of attribution, the unexpected decline in July non-farm employment was influenced by noise, impulse, and trend factors. In terms of "noise," local government education jobs declined by 50,000 in July, which was the main source of job losses in government sectors, attributed to the seasonal effects of the summer break and fiscal pressures on public school education, with the former contributing to some "noise"; Regarding impulse factors, employment in hotels and catering related to the World Cup, as well as administrative positions in local governments, saw negative growth in July, where jobs in leisure and hospitality fell by 40,000, compared to a previous loss of 43,000, to some extent reflecting the temporary job reductions following the World Cup; As for trend factors, both the three-month average trend and employment diffusion indicate a weakening employment landscape in the U.S. Horizontally, U.S. non-farm employment has consistently declined from a peak of 214,000 in March for four consecutive months, compounded by downward revisions to previous values and the latest figure turning negative, thus presenting a clearer downward trend in employment. Vertically, when excluding the seasonal effects weakening leisure and hospitality due to World Cup impulses and non-educational local government roles, employment in residential construction, non-durable goods manufacturing, retail trade, and financial activities has also turned negative. The one-month employment diffusion index, which measures employment breadth, dipped from 53.2% to 51.8%. Additionally, this month, data quality significantly improved, with the initial response rate from the survey rising from last month's low of 54.4% to 69.7%. Excluding the anomaly in September 2025 (government shutdown disturbances), this rate has reached a new high since May 2023. Supply and Demand Structure: The drop in the unemployment rate still stems from weak supply rather than strong demand. In July, the unemployment rate unexpectedly decreased from 4.19% to 4.09%, with expectations of 4.2%. Similar to the previous month, this unexpected drop in the unemployment rate was almost entirely due to a decrease in the labor force participation rate. Resident survey data indicates that resident employment fell by 87,000 in July, while the number of unemployed decreased by 178,000, with the overall labor force falling by 264,000. When accounting for natural population growth of 116,000, the non-labor force population increased by 381,000 in July, leading to a general weakening of the unemployment rate, employment rate, and labor force participation rate. Among the unemployed, those returning to the job market saw the largest decline, corresponding to a decrease in the newly available labor force; temporary unemployment surged, reflecting layoffs from temporary World Cup positions. Within the reduction in labor supply, the count of foreign-born workers on a non-seasonally adjusted basis experienced a significant decline in June and July, possibly linked to recent intensified enforcement against illegal immigration in the U.S. Outlook and Strategic Insights: Economic data in Q3 2026 is expected to remain weak, with significant room for cooling expectations of interest rate hikes. Overall, the July non-farm employment data turned negative due to compounded effects of seasonal noise, the fading World Cup impulse, and trend factors. Currently, the dual weakness and relative balance in the U.S. labor market trend has not changed, corresponding to the characteristic of volume contraction (declining non-farm employment) and stable prices (unchanged unemployment rate and hourly wages). From the asset price trends that evening, the market remained relatively restrained regarding accommodative monetary trading, still anticipating one rate hike by year-end. This implies that the market is awaiting new inflation data and other related statistics. Looking ahead, consistent with our prior outlook, as the short-term impulses from fiscal policies and the World Cup gradually fade and the delayed effects of tightening financial conditions become evident, the U.S. economy in Q3 2026 may enter a phase of cooling. This cyclical characteristic will resemble that of 2024-2025: a rise in Treasury rates and tightening financial conditions in Q2 suppressing demand has resulted in an unexpectedly weak non-farm employment report for Q3, which would lead to subsequent accommodative monetary policy from the Fed in September, but this time will not result in a rate cut in September; it will instead falsify the prospects for a rate hike. Therefore, we anticipate that the upcoming key data releases such as July CPI, August CPI, and the annual adjustment of non-farm employment will continue to weaken expectations for Fed interest rate increases, driving down U.S. Treasury rates and the dollar index while providing support for gold prices. Risk Warning: Unexpected changes in Trumps policies; overheating inflation in the U.S. leading the Fed to become unexpectedly hawkish; the Fed maintaining high interest rates for too long, causing a liquidity crisis in the financial system.