Huachuang Securities: Employment data supports the Federal Reserve to maintain its current stance.

Huachuang Securities released a research report stating that employment data supports the Federal Reserve's decision to remain on hold. For the Federal Reserve, stable employment is a cornerstone assumption as its focus and decision-making shifts toward inflation. It is on this basis that differing tolerances for inflation have led to increasing internal divisions within the Fed. The continued cooling of employment over the past two months, shifting towards weak but not collapsing, supports the rationale for maintaining the current stance and waiting to observe further declines in inflation, which also helps bridge internal differences. Currently, the inclination remains that the Federal Reserve can keep interest rates unchanged this year, as the rationale for a preemptive rate hike similar to that of 1997 is not sufficient. The main points from Huachuang Securities are as follows: Summary of July Non-Farm Data 1. Non-farm payrolls decreased by 23,000, below the expected 80,000, with the previous two months being revised down by a total of 103,000. Job growth primarily came from educational and health services (+25,000, previous +54,000), construction (+22,000, previous +5,000), and professional and business services (+18,000, previous +34,000). The industries experiencing job shrinkage include four sectors: government (-53,000, previous -10,000), leisure and hospitality (-40,000, previous -43,000), retail, and finance. 2. The unemployment rate dropped from 4.2% to 4.1%, against an expectation of 4.2%. The labor force participation rate fell from 61.5% to 61.4%, while the expectation was 61.6%. In the household survey, the labor force decreased by 264,000, employment fell by 87,000, the number of unemployed dropped by 178,000, and the non-labor force increased by 381,000. 3. Private sector hourly wages rose by 0.1% month-on-month, against an expectation of 0.3% and a previous value of 0.3%, with a year-on-year growth rate of 3.2%, compared to an expectation of 3.5% and a previous value of 3.4%. Weekly hours remained steady at 34.3 hours. Weekly earnings saw a month-on-month increase of 0.1%. 4. Market expectations for interest rate hikes have cooled, with the probability of a September rate hike priced in by the federal funds futures market dropping from 57% to 44%, and the expected number of rate hikes for the year decreasing from 1.35 to 1.13. Comprehensive Cooling of Employment Data First, from an overall perspective, the unexpected decrease in non-farm employment and significant downward revisions of the previous two months' data are notable. The average new non-farm payrolls over the past three months have dropped from 77,000 to 20,000, falling to the lower range of the breakeven employment growth level estimated by overseas institutions. Structurally, industry employment data is also disappointing. Although this months non-farm employment was significantly affected by local government education departments (-50,000, previous -11,600), the addition of non-farm jobs in the private sector has also been weak, with employment shrinking in leisure and hospitality, retail, and finance, the first two perhaps related to the fade-out of temporary hiring demands from the World Cup. The only sector seeing a stronger job growth is construction, driven by AI-related demand. Second, while the unemployment rate continues to decline unexpectedly, the main reason is still not more people have found work, but rather more people have exited the labor market. Although the participation rate for the prime age group (25-54 years) has slightly increased, the participation rates for teenagers and elderly individuals continue to decline significantly. The labor force participation rate has been declining steadily this year, diminishing the unemployment rate's indicative significance on the job market. An alternative observation metric is the employment-to-population ratio, which has decreased by approximately 0.8 percentage points this year, compared to a mere 0.3 points decrease over the entire previous year. Third, matching the weak job growth, the month-on-month growth rate of hourly wages fell below expectations, while the year-on-year growth rate dropped to its lowest level since June 2021. The de-anchoring of medium to long-term inflation expectations and the inflation-wage spiral are the core transmission channels for temporary price shocks to convert into persistent inflation. Currently, medium to long-term inflation expectations are stable, while year-on-year wage growth continues to decline, indicating a low risk of endogenous second-round inflation. Employment Data Supports the Federal Reserve's Inaction In July, non-farm employment continued to cool comprehensively, further corroborating the previous judgment that the significant employment rebound seen since the beginning of the year is not sustainable, and the narrative of overheating job growth has been further falsified. For the Federal Reserve, stable employment is a foundational assumption as it shifts its focus and decision-making toward inflation. On this basis, the differing tolerances for inflation have caused increasing internal divisions within the Fed. The cooling Of employment over the past two months, moving towards weak but not collapsing, supports the rationale for remaining on hold, waiting to observe further declines in inflation, which also helps bridge internal differences. The inclination remains that the Federal Reserve can keep interest rates unchanged this year, as the rationale for a preemptive rate hike similar to that of 1997 is not sufficient. For the market, in terms of U.S. stocks, the easing of rate hike pressures means that the risks associated with adverse macroeconomic scenarios continue to dissipate, leading to a marginal improvement in macro risk appetite. Regarding U.S. Treasury bonds, this helps ease upward pressure on real interest rates; should inflation not exceed expectations in the future, both short- and long-term U.S. Treasury rates may have already reached a stage of peak ranges, with low probabilities for significant further increases. Risk Warning: Uncertainties in geopolitical conflicts and uncertainties regarding trends in the AI industry.