US August Non-Farm Payrolls Reduce Probability of Rate Hike, Focus on This Week's Beige Book

Last week (8/28-9/1), global stock markets experienced a broad rally. In the US market, the S&P 500 index rose by 2.50%, the Dow Jones index increased by 1.43%, and the Nasdaq 100 index surged by 3.67%. In European stocks, the STOXX 600 index recorded a gain of 1.49%. In Asia, the Nikkei 225 index climbed by 3.44%.

【Source: MacroMicro；Date2023/8/28-2023/9/1】

【Source: MacroMicro；Date2023/1/1-2023/9/1】

On September 1st, the US Bureau of Labor Statistics released data showing that nonfarm payrolls in the US increased by 187,000 in August, surpassing expectations. However, there was a downward revision of 110,000 for June and July combined, marking three consecutive months below 200,000. Additionally, the rebound in labor force participation pushed the unemployment rate unexpectedly higher by 0.3 percentage points to reach 3.8%, the highest since February last year, while the growth rate of hourly wages slowed down.

【Source：MacroMicro】

Overall, this report indicates a gradual cooling of the labor market. Following the data release, market expectations for another interest rate hike by the Federal Reserve later this year have decreased. According to CME Fed Watch data, the market currently predicts a 93% probability of no rate increase in September, and the probability of a 25 basis point hike in November has fallen to 35.7%. The expected timing for a rate cut next year has been brought forward from June to May.

【Source：CME】

It should be noted that the current evidence may not be sufficient to prove that the Federal Reserve's tightening cycle has come to an end. During the recent Jackson Hole Symposium, Federal Reserve Chair Jerome Powell expressed concerns about "resilient US consumer spending, economy far exceeding long-term trends, and inflation resistance," suggesting that further monetary tightening may be necessary.

Mitrade Analyst：

The latest non-farm payroll data provides the Federal Reserve with some breathing room, and it is highly likely that there will be a pause in interest rate hikes in September. However, looking at the long term, there is still a possibility of further rate hikes later this year, as the latest August average hourly wage growth rate remains high at 4.3%, far exceeding the pace of economic growth and inflation. There is a potential for inflation to rebound again. Unless the Federal Reserve raises its long-term inflation target of 2%, there is still a chance of continued rate hikes in the second half of the year.

On August 31st, according to data from the US Department of Commerce, the year-on-year Personal Consumption Expenditures (PCE) price index in July rebounded from 3% in June to 3.3%. At the same time, the Federal Reserve's preferred inflation indicator, the core PCE price index excluding food and energy, saw a slight increase in year-on-year growth from 4.1% in June to 4.2%. Both figures were in line with market expectations.

【Source：MacroMicro】

Although PCE continues to accelerate, other detailed data is already showing the cumulative effects of interest rate hikes. From the income data perspective, the current high expenditure growth rate is unsustainable, as there was an increase of $7.3 billion in income compared to an increase of $144.6 billion in expenses. Credit card borrowing continues to rise while savings continue to decline.

Many analysts believe that as the excess savings brought about by the "money printing" during the pandemic are depleted, consumer spending will soften. Coupled with a slowdown in housing inflation and wage growth, it is expected that the Federal Reserve's preferred inflation indicator will further decrease in the next few months of 2023.

Mitrade Analyst：

Service sector inflation remains at a high level, compounded by unfavorable base effects going forward, making the decline in PCE slow and challenging. If the Federal Reserve focuses too much on its 2% inflation target, it could potentially lead the economy into a recession. Keep an eye on the Beige Book and speeches from the voting members of the Federal Reserve this week to gauge their views on the US economy and inflation trends.

Last week's release of the PCE and non-farm payroll data has led to a widespread expectation in the market that the Federal Reserve will abandon rate hikes within the year, resulting in a noticeable increase in optimism.

According to Stephen Suttmeier, a technical analyst at Bank of America, based on the current "golden girl" scenario of the US economy (i.e., robust economic growth accompanied by weakening inflation and interest rates), the stock market is expected to hit a historic high by the end of this year. He stated, "When the stock market rises by 10%-20% in September, 65% of the time in that month has positive returns... For September 2023 and the remaining time this year, the stock market will demonstrate a bullish trend."

However, many analysts still harbor concerns about the traditional September curse in the US stock market. Over the past 10 years, the Nasdaq 100 index has experienced an average decline of 0.6% in September, making it the only month with negative performance throughout the year.

Mitrade Analyst：

The current long-term US Treasury bond yield remains high, which continues to exert certain pressure on the valuation of technology stocks. Based on historical experience, if the US stock market declines in September, there is a strong likelihood of an upward trend in the index in the fourth quarter. Conversely, if the market continues to rise in September, it will squeeze the upward potential in the fourth quarter, increasing the risk of a correction in the US stock market.