Economic Downturn? Job Report Crashes US Bonds, Interest Rate Cut Timing Set?

With the release of two employment reports, the U.S. financial market has experienced a wave of turmoil, with U.S. stocks initially falling and then rising, and U.S. Treasury bonds eventually experiencing a pullback. Most importantly, the timing of the Federal Reserve's interest rate cut has become clearer.

The two employment reports have disrupted the global financial market.

And tonight's script has been full of twists and turns. Remember that I made a forecast before, saying that this year's world will inevitably be a year full of ups and downs, with more black swan events than in 2023.

So today, let's discuss the Federal Reserve's interest rate cuts through the two employment reports released tonight. Writing is not easy, so please feel free to like, share, and bookmark.

The non-farm report greatly exceeded expectations, causing a sell-off in the U.S. stock market?

The non-farm report is the most important employment report in the United States, and the December data showed that the U.S. non-farm employment population unexpectedly increased by 216,000, while the market's previous expectation was 170,000, so this data greatly exceeded expectations.

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December non-farm data released, U.S. employment performance remains strong

What does employment exceeding expectations mean? It indicates that the U.S. economy is resilient, market demand is strong, so companies have more job openings, ultimately leading to an increase in the employed population. This is a significant positive for the U.S. economy, after all, more employment is a good thing. Currently, the U.S. unemployment rate is 3.7%, which is slightly better than the previous 3.8%.

However, a good U.S. economy is not necessarily good for the capital market. This is because the U.S. economy currently has two major contradictions: inflation and economic recession.

2024 is a year of economic recession in the United States, so the market has previously anticipated that this year the Federal Reserve will use the means of easing interest rates to print money and inject dollars into the market to support the U.S. economy. Many institutions have already made operations in the financial market, such as buying U.S. Treasury bonds and stocks, waiting for the realization of this interest rate cut expectation.The market has begun to anticipate the Federal Reserve's "anticipation" and is attempting to profit from it. For instance, U.S. Treasury yields have dropped from 5% to the current 4%, while the three major U.S. stock indices have previously seen a sustained surge. This is the "advance positioning" by U.S. financial investment institutions, hoping to profit from the Federal Reserve's interest rate cut expectations.

However, the data from this non-farm report has dealt a heavy blow to these "interest rate cutters," causing the market to worry that the previous expectations for rate cuts were too aggressive, leading to a further cooling of rate cut expectations. This is because when the issue of economic recession, one of the two major contradictions in the U.S. economy, is not as urgent, the Federal Reserve will naturally focus on addressing inflation, using measures including maintaining high interest rates of 5.25-5.5%, and not ruling out the possibility of rate hikes.

So, can we conclude from this that the U.S. economy is doing better? Will the interest rate cuts in the U.S. this year be postponed to the third quarter? Things are not that simple.

The ISM service sector index plummets, has the U.S. economy finally entered a recession?

Shortly after the non-farm report was released, the U.S. published an ISM service sector report. The expected index was 52.5, but the actual figure was only 50.6; the data significantly missed expectations.

The December ISM report came out, and the employment data was a mess.

This index essentially reflects the data of the U.S. service sector, indicating the prosperity of the U.S. economy. The significant miss in data suggests that the U.S. economy is receding more rapidly than experts previously anticipated.

If we take a closer look at its sub-items, we can determine that new orders in the current U.S. service sector have declined, reaching a three-month low.Employment has also begun to contract, with the separate employment sub-index scoring only 43.3 points, marking the lowest value since the pandemic began. This indicates that societal demand is no longer as high, and the U.S. labor market is facing significant downward pressure. Jobs have become harder to find.

A wave of layoffs in the U.S. is approaching a peak.

Of course, there is also a price index, which stands at 57.4, but the slowdown in its decline suggests that while costs in the U.S. are rising, price pressures are beginning to ease, implying that inflation is under control. This is somewhat consistent with the data we have observed.

In summary, after the release of the ISM service sector data, it generally fell below economists' expectations. Many interviewed experts expressed concerns about the uncertainty of the U.S. economy and began to worry about geopolitical events, labor, and employment issues.

The ISM data directly offsets the non-farm employment report data, showing us that while the U.S. economy appears resilient, a recession has indeed begun to quietly arrive. If the U.S. economic data is not fabricated, then this is a turning point for the U.S. economy from being resilient to beginning a recession.

That is why we see these two reports released almost simultaneously, yet having opposite effects on the economy, U.S. Treasury bonds, the dollar, and gold.

The release of the two reports has caused financial markets to be in turmoil.

Just mentioned, the release of the non-farm employment data report led to a decline in the U.S. stock market and an increase in U.S. Treasury yields. However, the ISM report began to push the financial markets in the opposite direction.

Due to the indication of signs of economic recession in the U.S., expectations for a rate cut by the Federal Reserve have been reopened, and the three major U.S. stock indices began to rise, ultimately ending flat.

U.S. Treasury yields have warmed up to 4%.So, what is the current schedule for the Federal Reserve's interest rate cuts? At present, the probability of a rate cut in February remains low. However, according to federal funds rate swap data, the probability of the Federal Reserve cutting rates by 25 basis points in March has already reached as high as 70%.

In fact, at the beginning of this year, the market has been continuously turbulent. Including two reports from the United States last night, they were simply playing tricks, leaving global financial bigwigs looking bewildered. Whether the United States will continue to release such outrageous reports with basically opposite conclusions is anyone's guess.

Perhaps at the critical moment when the Federal Reserve shifts from raising interest rates to cutting them, the financial market is like encountering a stormy sea. It is full of risks and opportunities. The Federal Reserve and the U.S. economy will also move from tightening to easing amidst the waves.

Summary

Overall, the employment situation in the U.S. labor market is very complex. The non-farm data indicates that the U.S. economy is resilient, and it seems that the U.S. economy will remain strong until 2024, with no signs of a significant downturn.

However, the ISM employment data directly opens a gap in the optimism of the non-farm data. It tells the world that the non-farm data is wrong, my data is correct, the U.S. employment data is that bad, and even set a record for the worst since the post-pandemic era.

Of course, some economists believe that the ISM data seems to be just an exception and it is necessary to continue to refer to other data to make a correct judgment on the U.S. economy. More netizens commented that this is probably data fraud on the U.S. side, and they will "revise" the current data in a few months, and at that time, the data will be correct.

So, is it U.S. data fraud or the complexity of the U.S. economy that leads to the release of these two sets of data with different conclusions almost at the same time, playing tricks on the global financial market? We still need to continue to follow up.

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