US Non-farm Payrolls (NFP) reaction may be exaggerated, Fed may take a cautious stance

The recently released July US Non-farm Payrolls (NFP) data fell short of expectations, raising concerns in the market about the outlook for the US economy. However, some analysts believe that the market's reaction may be excessive, and the Fed's assessment of the economic situation might be more cautious.

Market Reaction May Be Excessive, Fed Position Still Needs Observation

History shows that the U.S. market often reacts more strongly to interest rate cuts than to hikes. In July, the Fed did not cut rates early as some observers had expected, and the subsequent US Non-farm Payrolls (NFP) data came in significantly below expectations, leading to a sharp decline in most asset prices. However, this extreme reaction may not fully reflect the true state of the U.S. economy.

There are signs that the Fed may not believe the United States is facing a serious recession risk. In an interview in July, the Fed Chairman still held some hawkish positions, indicating that after seeing the July employment data, he still chose to keep the option of continuing to suppress inflation through high interest rates. This shows that the Fed's judgment on the economic situation may be more cautious.

Single month data volatility is not enough to determine recession

The current description of the U.S. economic situation should be "slowing growth" rather than deep recession. From the perspective of income and consumption, personal consumption and disposable income in June have not changed much compared to the beginning of the year. At the same time, other recently released data also show that the U.S. economy still has a certain degree of resilience.

The service industry index for July and the number of initial jobless claims for August both exceeded expectations, alleviating the extreme pessimism in the market to some extent. These relatively positive economic indicators suggest that the US economy may not be sliding into recession as quickly as some market participants are concerned.

Special Factors Affecting July Employment Data

The powerful hurricane "Beryl" that swept through Texas in early July may have had a significant impact on the employment data for the month. According to statistics, the number of non-farm workers who did not participate in work due to severe weather reached a record high of 436,000 in July. In addition, over 1 million people could only engage in part-time work due to weather reasons. These abnormal employment conditions were likely underestimated in the sampling survey, thereby affecting the overall employment data.

Structural factors push up unemployment rate

In addition to short-term factors, some structural changes may also lead to an increase in the unemployment rate. First, the increase in illegal immigration after the pandemic has had a certain impact on the domestic low-skilled labor market. Second, workers who exited the labor market during the pandemic are gradually returning, which may temporarily raise the unemployment rate.

In addition, as various relief measures during the pandemic gradually phase out, some individuals who originally relied on these benefits are forced to seek employment again, which has also increased the labor supply to some extent.

It is worth noting that this increase in labor supply may actually be a sign of economic recovery. In the long run, the increase in labor supply helps to curb inflation and provides greater room for the Fed's future monetary policy operations.

Overall, although the July US Non-farm Payrolls (NFP) data fell short of expectations, the monthly data fluctuations are insufficient to determine the economic trend. The Fed may assess various economic indicators more cautiously in order to formulate appropriate monetary policy. Market participants also need to analyze all data comprehensively to avoid overreacting to a single indicator.