Soochow Securities Co., Ltd.: In July, the U.S. non-farm payroll unexpectedly turned negative, and there is still significant room for cooling interest rate hike expectations

According to the Zhitong Finance APP, Soochow Securities released a research report stating that the U.S. added non-farm jobs unexpectedly turned negative in July. Looking ahead, as the short-term impulses from fiscal measures and the World Cup gradually recede, and the lagging effects of tightening financial conditions become apparent, the U.S. economy may experience a phase of cooling in Q3 2026. The firm expects that the upcoming important data, including the July CPI, August CPI, and non-farm payrolls, as well as the annual adjustments of non-farm payrolls, will continue to weaken the Federal Reserve's interest rate hike expectations, pushing U.S. Treasury yields and the U.S. dollar index down, while providing support for gold prices.

Core Views

July Non-Farm: Unexpected job losses, unemployment rate continues to decline. The U.S. non-farm payrolls in July decreased by 23,000, with expectations of an increase of 80,000, and the previous value was revised down from 57,000 to 20,000, with a cumulative downward revision of 103,000 over the past two months. The three-month average was revised down from 77,000 to 20,000. Similar to the July ADP private employment data, U.S. non-farm employment ended its "brief resurgence" trend and returned to a downward trajectory. Meanwhile, the unemployment rate fell again to 4.1%, with expectations and the previous value at 4.2%. Structurally, similar to last month, the decline in the unemployment rate is more due to a contraction in labor supply. After the data release, despite the unexpected negative non-farm figures, the market did not trade on recession due to the unemployment rate falling more than expected. The market still primarily narratives around loose monetary policy (cooling interest rate hike trades): gold, U.S. stocks, and copper rose, while the U.S. dollar index and Treasury yields fell. The implied probability of a Federal Reserve rate hike in September dropped from 57% before the data release to 44%, and the annual rate hike expectation fell from 1.35 times to 1.15 times, with U.S. Treasury yields and the dollar index declining, while gold and commodities rose.

Employment Structure: The cooling of employment demand is universal rather than structural. On the corporate side, employment in the goods sector increased by 25,000, of which 22,000 came from the construction industry; employment in the service sector increased by 50,000, with jobs in trade transportation, financial activities, and leisure and hospitality all turning negative month-on-month. In terms of attribution, the unexpected negative non-farm figures in July were influenced by noise, impulses, and trend factors. ① In terms of "noise," the reduction of 50,000 jobs in education within local governments was the main source of the decline in government employment, which was affected by seasonal effects from the summer vacation and fiscal pressures on public school education, with the former having a certain degree of "noise"; ② In terms of impulse factors, employment in hotels & restaurants related to the World Cup and general administrative positions in local governments experienced negative growth in July, with leisure and hospitality jobs decreasing by 40,000, compared to a previous decrease of 43,000, which to some extent corresponds to the temporary employment decline brought by the World Cup; ③ In terms of trend factors, both the three-month average trend and employment diffusion indicate a weakening employment situation in the U.S. Horizontally, U.S. non-farm employment has fallen for four consecutive months from a peak of 214,000 in March, combined with downward revisions of previous values and the latest negative figures, the downward trend in employment has become quite clear. Vertically, if we exclude the leisure and hospitality sector and non-education departments of local governments weakened by the World Cup impulse, as well as the local government education departments amplified by seasonal factors, employment in residential construction, non-durable goods manufacturing, retail trade, and financial activities has all turned negative, and the one-month employment diffusion index, which measures employment breadth, has also fallen from 53.2% to 51.8% In addition, the quality of data this month has significantly improved, with the initial questionnaire feedback rate rising from last month's low of 54.4% to 69.7%. Excluding the anomaly in September 2025 (government shutdown disruption), this is already the highest since May 2023.

Supply and Demand Structure: The decline in the unemployment rate still stems from weak supply rather than strong demand. The unemployment rate unexpectedly fell from 4.19% to 4.09% in July, against an expectation of 4.2%. Similar to last month, the unexpected decline in the unemployment rate was almost entirely due to a decrease in the labor participation rate. The resident survey indicated that in July, employment decreased by 87,000, the number of unemployed decreased by 178,000, and the overall labor force decreased by 264,000. Additionally, with a natural population growth of 116,000, the non-labor force population grew by a total of 381,000 in July, leading to a simultaneous weakening of the unemployment rate, employment rate, and labor participation rate. Among the types of unemployed, the largest decrease was seen in return-to-work seekers, corresponding to the reduction in new labor supply; the number of temporary unemployed significantly increased, corresponding to layoffs from temporary jobs related to the World Cup. In the reduction of labor supply, the number of foreign-born workers, not seasonally adjusted, saw a significant decline in June and July, possibly related to the recent increase in U.S. enforcement against illegal immigration.

Outlook and Strategic Insights: Economic data for Q3 2026 is expected to remain weak, with significant room for cooling interest rate hike expectations. Overall, the new non-farm employment data for July turned negative under the combined effects of seasonal noise, the fading of World Cup impulses, and trend factors. The current trend of weak supply and demand in the U.S. labor market, relatively balanced, has not changed, corresponding to the characteristics of "reduced quantity (non-farm decline) and stable price (unemployment rate and hourly wage flat)." From the asset price trends that evening, the market's response to loose monetary trading has been relatively restrained, still anticipating one interest rate hike by the end of the year. This means the market is still waiting for new inflation data and other indicators. Looking ahead, consistent with our previous outlook, as the short-term impulses from fiscal policy and the World Cup gradually recede, and the lagging effects of tightening financial conditions become apparent, the U.S. economy in Q3 2026 may experience a phase of cooling, a cyclical characteristic similar to that of 2024-2025: the rise in U.S. Treasury rates and tightening financial conditions in Q2 suppress demand, leading to an unexpectedly weak non-farm employment in Q3, prompting subsequent loose monetary policy from the Federal Reserve in September, but this time not leading to a rate cut in September, but rather disproving the rate hike in September. Therefore, we expect thatthe upcoming important data, including July CPI, August CPI, non-farm payrolls, and annual adjustments to non-farm payrolls, will continue to weaken the Federal Reserve's interest rate hike expectations, pushing U.S. Treasury rates and the U.S. dollar index down, and providing support for gold prices.**

Risk Warning: Unexpected changes in Trump’s policies; overheating U.S. growth and inflation leading the Federal Reserve to turn hawkish beyond expectations; the Federal Reserve maintaining high interest rates for too long, triggering a liquidity crisis in the financial system