The latest non-farm data released by the U.S. Department of Labor is like a bombshell, causing ripples in the market and delivering a significant blow to the hawkish stance within the Federal Reserve. Macro analyst Neil Dutta sharply commented: “This data is undoubtedly a comprehensive setback for policy hawks and bulls who are firmly optimistic about economic growth.”
This non-farm employment data is extremely bleak, with the U.S. adding only 22,000 jobs in August, a number that is far from the market's previous expectation of 75,000, resembling an insurmountable chasm. At the same time, the unemployment rate has climbed to 4.3%, clearly revealing the weak state of the job market. Looking back, such poor data performance is indeed rare, and it has put the Federal Reserve officials, who have always maintained a hawkish stance and advocated for the current monetary policy or even tended towards further tightening, in a difficult position.
For a long time, hawks within the Federal Reserve have believed that even if the economy faces certain fluctuations, they should adhere to a tough monetary policy stance to curb potential inflation risks and safeguard the stability of the dollar. They firmly believe that the U.S. economy has enough resilience to maintain steady growth within the existing policy framework. However, this non-farm data ruthlessly shattered their illusions. Such sluggish employment growth indicates that the pace of U.S. economic recovery is severely hindered, corporate expansion intentions are low, a large amount of labor is idle, and the risk of the economy falling into stagnation or even recession is sharply rising. In this severe situation, the hardline policies insisted upon by hawks seem out of touch and may even exacerbate the economic dilemma.
It is worth mentioning that Federal Reserve Chairman Powell previously stated: "Now is the time to unleash the powerful tools of U.S. monetary policy." This statement carries more significance against the backdrop of the current non-farm data. In the face of poor employment data, the market generally believes that the Federal Reserve must take decisive action and use monetary policy tools to stimulate the economy and save the job market. This is in stark contrast to the hawkish stance that has long advocated for conservative monetary policy, which clearly cannot meet market demands at a time when the economy urgently needs a boost.
From the market reaction, after the non-farm data was released, U.S. Treasury yields plummeted, and the U.S. dollar index suffered a severe setback. Investors rushed to sell dollar assets in search of safer havens. In the stock market, the three major indices experienced significant volatility, with technology and financial stocks leading the decline. Market expectations for corporate future earnings have been greatly discounted due to a weak job market. This series of market turbulence fully reflects concerns about the U.S. economic outlook and dissatisfaction with the current monetary policy of the Federal Reserve. Under such pressure, the influence of hawks within the Federal Reserve is bound to be weakened, while the dovish stance advocating for interest rate cuts and other easing policies may become the mainstream direction of Federal Reserve policy in the future.
Looking ahead, the decisions made at the Federal Reserve's monetary policy meeting on September 17 and 18 are highly anticipated. In such a sluggish job market, the market generally expects the Federal Reserve to make a significant shift and adopt interest rate cuts, with the possibility that the extent of the cuts may exceed expectations. However, interest rate cuts are not a cure-all. On one hand, while cuts can stimulate economic growth and increase market liquidity to a certain extent, they may also trigger inflation risks. On the other hand, deep-rooted issues facing the U.S. economy, such as trade frictions and industrial restructuring, cannot be completely resolved by monetary policy alone. Regardless of how the Federal Reserve ultimately decides, it will have a profound impact on global financial markets, and investors are holding their breath, closely monitoring every move of the Federal Reserve.
