According to data released by the U.S. Department of Labor on September 6, the preliminary estimate of new jobs added in the United States in August was 142,000, and the unemployment rate dropped to 4.2%, indicating that the job market conditions do not seem to be bad, and the S&P 500 index futures also instantly rose to around 5530. However, as the report information was digested by the market, investors soberly realized the deterioration of the employment situation: the number of new jobs added was lower than the market's expected 165,000, and the preliminary estimate for July was downwardly revised to 89,000 jobs; selling behavior on the day led to a market-wide decline. The Dow Jones Index, which is mainly composed of blue-chip stocks, fell by 410.34 points, or 1.01%, the S&P 500 Index fell by 94.99 points, or 1.73%, and the Nasdaq Index, which is mainly composed of technology stocks, fell by 436.83 points, or 2.55%.

The pessimistic sentiment in the stock market also spread to other markets. The December gold futures fell by $16.3 per ounce, or 0.64%; the October Texas light crude oil futures closed at $68.16 per barrel, down 1.43%; the US dollar index closed at 101.14 points, with almost no change; the ten-year Treasury bond yield closed at 3.716%, and the two-year Treasury bond yield closed at 3.654%, temporarily ending the inverted yield phenomenon since June 2022.

The employment report leaves the market with too many doubts and thoughts: Is the U.S. job market deteriorating at an accelerating pace? Is a U.S. economic recession really inevitable? Does the positive spread of interest rates predict an impending economic recession, or is the economic situation improving? Will the Federal Reserve cut by 25 basis points or 50 basis points on September 18?

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The slowdown in the growth of the U.S. job market, with little change in industry conditions

Looking at the industry data, there is little change in the U.S. labor market: the manufacturing and information industries continue to cut jobs, while the education, health, and leisure industries continue to provide a large number of job opportunities. In July, the main distribution of new jobs was in construction and the service industry: construction (25,000), trade, transportation, and warehousing (22,000), health and social work (64,000), accommodation and catering (25,600), and local government education departments (26,200), while the industries that cut jobs across the board included mining and logging, manufacturing, information industry, finance and insurance, professional and technical services, and other services.

Compared with July, the new jobs added in August were also concentrated in construction and the service industry: construction (34,000), private education, health, and social work (47,000), accommodation and catering (33,000), and local governments (including education departments) (22,000); the industries that cut jobs across the board included manufacturing (24,000), information industry (4,000), etc., but the scope of layoffs was smaller than in July.

The signals released by the U.S. economy are contradictory

Inflation has cooled down, but the economic costs it has generated will continue to affect families and businesses for a longer period. High prices have left many families in a tight spot, and to cope with daily expenses, many people have to take on an extra job, the most common of which is being an Uber driver. Companies have also become very cautious in recruitment, and even if there are vacancies, they are not in a hurry to recruit new people; technology giants would rather keep signing short-term contracts than offering long-term contracts to newcomers. The current economic environment does not give companies enough confidence.

The performance of the financing market is even more confusing. On the one hand, stock market financing has not yet returned to normal. As of September 6, despite the recent decline in stock market indices, the S&P 500 index has risen by 13.39% this year, with technology giants contributing 70% of the increase in the index, and artificial intelligence becoming the hottest investment field. The overall performance of the U.S. stock market is relatively good, but stock financing is lukewarm, with a financing amount of $130.8 billion from January to August, and at the current pace, the annual financing will not exceed the normal level of $20 billion before the epidemic. The S&P 500 index has recently set a new high, and the index is currently only 2.5% lower than the highest value, indicating that the probability of an economic recession occurring is very small.

On the other hand, corporate bond financing from January to July was $134.3 trillion, exceeding the annual level of some years, but asset-backed bond financing is still at a low level. U.S. Treasury bond yields have fallen to their lowest level since 2022, crude oil has wiped out all the gains of the year, and copper has fallen for 13 out of the past 16 weeks. The bond market and commodity market indicate that the possibility of an economic recession is increasing. Last Friday, the phenomenon of a general decline in U.S. financial assets was rare, which may indicate that market risks have changed?Inflation changes continue to influence the Federal Reserve's interest rate cut intensity.

Compared to 2022, inflation in the United States has cooled down, with the inflation rate in July at 2.5%, and the core inflation rate, excluding food and energy, at 2.6%. The current fluctuation range is basically maintained within a 0.1% range, and the series of data has given Federal Reserve policymakers enough confidence. In the past two months, Federal Reserve officials have repeatedly released positive signals for interest rate cuts, mentioning several times the dual mandate of the Federal Reserve: to promote full employment and to maintain price stability. They generally believe that an interest rate cut in September is a good opportunity, fearing that acting too late could endanger the job market. Therefore, they prefer to act early to stabilize the job market rather than act late and be ineffective.

One of the important bases for the Federal Reserve's decision-making is the Personal Consumption Expenditure Price Index (PCE). As shown in Figure 2, both nominal inflation (blue line) and core inflation rate (orange line) show a significant downward trend. However, the Federal Reserve's monetary policy has set an inflation target of 2%, which has not yet been achieved. The core inflation in the recent period seems to have stabilized at 2.6%, and there is still some uncertainty about whether inflation will continue to fall. The Federal Reserve wants to take action to clear the bad reputation it has gained from frequent policy mistakes in previous years and is eager to prove to the market that they can control the economic situation well.

How much will the Federal Reserve cut interest rates in September?

The performance of the U.S. stock market mainly reflects the follow-up effects of NVIDIA's performance, which has little to do with other factors. The price-to-earnings ratio of the S&P 500 index is about 21 times, which means that the expected return on investment for listed companies is 5%, which is roughly the same as the short-term yield of government bonds. However, the risk level of stocks is higher than that of government bonds, so the current price is still relatively high. This round of market performance is driven by the frenzy of artificial intelligence investment. U.S. tech giants have made big bets, but their quarterly performance is below market expectations. The chip industry is not performing well. Many chip companies at home and abroad have built new factories in the United States in order to obtain subsidies from the U.S. government, and the progress of all projects is currently slow. The investment of chip companies themselves is not small. Once the chip demand market is saturated or cools down, these investments may be "wasted," and both the government and companies will have to bear huge losses. More than 60% of the chip industry's consumer demand is in the Asia-Pacific region, but the United States wants to concentrate production capacity in its own country in order to achieve the goal of completely controlling and monopolizing global production capacity. This itself does not conform to the laws of market economy, and the outcome is self-evident.

Before the Federal Reserve's decision on September 18, the Consumer Price Index (CPI) to be released by the U.S. Department of Labor on the 11th is quite crucial. If inflationary pressure remains, the Federal Reserve may cut interest rates by 25 basis points. If inflationary pressure decreases significantly and the recent stock market performance is poor, the Federal Reserve can take a gamble and cut interest rates by 50 basis points. However, out of macro-prudence and the need for steady monetary policy operations, the Federal Reserve may adopt a gradual approach, that is, cutting 25 basis points each time, leaving room for maneuver for its own mistakes. Therefore, the Federal Reserve is more likely to cut 25 basis points first, and then make adjustments based on the new economic development situation later.

If the Federal Reserve cuts interest rates by 50 basis points, this will undoubtedly send a severe warning to the market: the economic situation is quite severe. This move will actually exaggerate the seriousness of the economic problem and cause panic in the market. Once the idea of an impending economic recession "takes root" in the minds of investors, families, businesses, and investment institutions are very likely to take early risk-avoidance measures, turning the speculation of an economic recession into reality. The employment report for August can only be said to be not very good, but it is not too bad either. The Federal Reserve is unlikely to take the risk of cutting 50 basis points because of this report, and this is not their decision-making style.

The adjustment of the U.S. technology industry, the snowball effect of government debt, and the uncertainty of economic policy after the 2024 election may be the biggest obstacles to the expansion of the U.S. economy. Economic protectionism is prevalent, the Middle East conflict continues, and the Russia-Ukraine conflict is prolonged, leading to an increase in the cost of world economic operations. The economic development of other countries and regions in the world encounters difficulties, and the operation of the U.S. economy must also be unsmooth. These issues may also trigger a recession in the U.S. economy, and the Federal Reserve will be powerless to do anything about it.