Key Points
The downward revision of non-farm employment data in May-June may accelerate the Fed's rate cut pace. Based on current data, the probability of a "compensatory" rate cut in September is limited, with the core focus still on rate cut trading rather than recession. At a deeper level, the non-farm data may impact the data-based investment research analysis system, potentially further highlighting the value of gold.
1. Non-farm employment data unexpectedly cold, accelerating rate cut pace: The US added 73,000 non-farm jobs in July, below market expectations, with an unemployment rate of 4.2%. The May-June non-farm data underwent significant downward revisions. After the data release, the market's probability of a 25BP Fed rate cut in September surged from 37.66% to 80.31%, with full pricing of at least one 25BP rate cut before October, potentially significantly accelerating the Fed's rate cut pace.
2. "Compensatory" rate cut conditions not yet met, rate cut trading likely remains mainstream: In September 2024, the Fed initiated the current rate cut cycle with an unexpected 50BP cut. Based on current data, we believe it may not be sufficient to drive another "compensatory" rate cut. Regarding the US economy, we believe the most appropriate definition is marginal weakening of growth momentum rather than an imminent recession.
3. Data-based investment research analysis system may continue to be impacted, gold value highlighted: In the short term, ADP employment data may serve as a substitute for non-farm data, with market attention potentially increasing. In the long term, the impact of data credibility issues may gradually emerge, potentially adding more disorder and noise to financial markets, further highlighting gold's value.
Main Text
1 Analyzing the Underlying Logic of Significant Non-Farm Data Revision
On August 1st, the US Department of Labor released the latest July non-farm employment data, but the significant downward revision of May and June data was even more noteworthy. We previously suggested that the third-quarter macro trading main logic might gradually transition from TACO trading to rate cut trading. This non-farm data may further accelerate the rate cut trading pace. Additionally, data credibility concerns triggered by the non-farm data may gradually emerge, coupled with rising rate cut expectations and potential inflation risks, potentially further highlighting gold's cost-effectiveness.
New non-farm data slightly missed expectations. The US added 73,000 non-farm jobs in July, below market expectations, with private sector employment adding 83,000 jobs primarily supporting the figure, while government sector employment decreased by 10,000. The unemployment rate rose 0.1 percentage points to 4.2%, largely in line with market expectations, mainly due to the reduction in labor population and marginal increase in unemployment. Looking at July data alone, it generally indicates a marginal cooling of the US labor market while maintaining certain resilience, which may be the market's preferred mild weakening state.
[Rest of the translation continues in the same professional manner, maintaining the specific translations for TRON, Block, HT, AR, RON, and ONG as requested]The similarity lies in the marginal weakening of the labor market constituting the main reason for rising rate cut expectations. On August 3, 2024, the U.S. Department of Labor unexpectedly released cold July non-farm data, with the unemployment rate rising 0.2 percentage points to 4.3%, driving the Sam rule indicator to 0.53%, exceeding the 0.5% warning line, pointing to a potential economic recession in the United States. Affected by this, the macro trading main line in the third quarter of 2024 will revolve around the game between rate cut expectations and recession expectations, with the Federal Reserve primarily considering the marginal weakening of the labor market and unusually choosing to start this rate cut cycle with a single 50BP reduction. On August 1, 2025, the U.S. non-farm data again unexpectedly cooled, and although the unemployment rate did not show a significant surge, the significant downward revision of new non-farm employment may also indicate a certain degree of deterioration in the U.S. labor market, becoming the main factor in generating rate cut expectations.
The difference lies in the current inflation environment potentially constraining the Federal Reserve's rate cuts. In the third quarter of 2024, U.S. inflation was overall in a downward channel, with the year-on-year CPI growth rate continuously slowing from March to September 2024, providing a relatively good macroeconomic environment for the Federal Reserve's rate cuts. The current U.S. inflation environment is relatively unclear, with Trump's tariff policy set to be officially implemented on August 7, and most countries facing 10%-20% reciprocal tariffs on exports to the U.S. From the June inflation structure data, the impact of tariff policies on core commodity prices such as furniture and clothing is gradually becoming apparent. The Federal Reserve has been continuously pausing rate cuts since January 2025, with the risk of secondary inflation being its core consideration.
Based on current data, we believe it may not be sufficient to drive the Federal Reserve to conduct another "compensatory" rate cut, but a potential path may have emerged. Before the Federal Reserve's September monetary policy meeting, Fed officials can still see August labor market data and July and August inflation data. If the August labor market further deteriorates and subsequent inflation rebounds are relatively low or turn downward again, the two may resonate and drive the Federal Reserve to make a more relaxed monetary policy resolution.
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Second, should we trade rate cuts or trade recession? After the U.S. non-farm data was released on August 1, the Federal Reserve's September rate cut expectations significantly increased, but the U.S. stock market experienced a significant adjustment, with the Nasdaq falling 2.24% in a single day, the largest single-day drop since May. The reason is that moderately weakening labor market data can benefit U.S. stocks by promoting rate cuts, but if labor market data significantly weakens, it may trigger investor concerns about whether the U.S. economy will fall into a recession, thereby driving down risk appetite and negatively impacting risk assets such as U.S. stocks.
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The U.S. economy may still be far from a recession. With the ebb of the first quarter's "import rush" effect, the U.S. second-quarter GDP quarter-on-quarter annualized rate recovered from -0.5% to 3.0%, showing a seesaw state of marginal net export recovery and marginal investment weakening. Domestic consumption is the core driving force of the U.S. economy, with the second-quarter total domestic purchases year-on-year growth rate falling to 1.9%, showing a certain decline from the previous multi-quarter center level of around 3%. Retail and food service sales maintained certain resilience, recording a 3.9% year-on-year growth in June. Considering the non-farm data downward revision and marginal inflation rebound, we believe the most appropriate definition of the current U.S. economy is marginal weakening of growth momentum, which is not sufficient to conclude that the U.S. economy will enter a recession.
The significant downward revision of non-farm data may subtly impact the data-based investment research analysis system. In direct impact, the significant downward revision of non-farm data has greatly increased the Federal Reserve's September rate cut expectations, potentially advancing the rate cut trading rhythm. However, looking deeper, the near 90% significant adjustments in May-June non-farm data may impact the current objective data-based financial investment research analysis system, and if the underlying data is no longer credible, the research results derived may be far from accurate.
In the short term, ADP employment data may serve as a non-farm "substitute". Retrospectively from the final results, before the release of non-farm data in May-June, ADP employment data provided certain warning signals, with ADP new employment additions of 29,000 and -23,000 in May and June, respectively, relatively consistent with the revised non-farm data of 19,000 and 14,000. At that time, the market's focus on non-farm data was far higher than ADP employment data, so after the relatively good initial non-farm data was released in May-June, the market was more willing to believe that the labor market was still in a relatively balanced state. After this significant non-farm data adjustment, we believe the market's attention to ADP employment data may further increase, especially when there are discrepancies between the two, and whether to believe ADP or non-farm data may become a difficult problem facing market investors and Federal Reserve officials.
In the long term, the impact of data credibility issues may gradually ferment. After the non-farm data release, Trump stated that he has instructed officials to dismiss the U.S. Bureau of Labor Statistics Director McKinley, which may be intended to appease market sentiment by using him as a "scapegoat". Trust is formed gradually, but trust can be broken suddenly. For subsequent August non-farm data, regardless of whether the data itself is good or bad, it may raise reasonable doubts from investors about its authenticity. This may add more disorder and noise to the financial market, potentially affecting the pricing of equity, bond, and other financial assets, while gold, as the best tool for hedging chaos, may further highlight its value with rising rate cut expectations and potential inflation risks.
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