CICC comments on the US non-farm payroll in March: More concerns lie in "inflation" rather than "stagnation".

CICC releases its analysis of the US March non-farm payrolls. The team believes that the improvement in employment data this month is mainly due to a significant increase in the leisure, hospitality, and retail sectors, while the commodity and manufacturing sectors have generally declined. This non-farm report indicates that the foundation of the US economy is not bad, at least not facing immediate recession pressures as feared by the market. The bigger risk is the "stagflation-like" situation caused by tariffs. Summary: In March, non-farm payrolls added 228,000 jobs, significantly better than the expected 140,000 and the previous month's 151,000 (revised down to 117,000). Although the unemployment rate increased to 4.2%, exceeding expectations and the previous month's 4.1%, the labor force participation rate also increased from the previous 62.4% to 62.5%. In addition, wage growth is relatively modest, with a flat monthly rate of 0.3% and a year-on-year decrease to 3.8%, significantly better than the expected 4%. The improvement in employment data this month is mainly due to a significant increase in the leisure, hospitality, and retail sectors, while the commodity and manufacturing sectors have generally declined. Although federal government employment continued to decrease by 4,000 (reflecting layoffs), state and local government employment increased by 23,000, leading to a slight overall increase in government employment. However, the Challenger job cuts index in March surged to more than three times that of February, and whether this will be reflected in next month's non-farm data is still worth watching. This non-farm report highlights several issues: 1) The foundation of the US economy is not bad, at least not facing immediate recession pressures as feared by the market; 2) Gradual slowdown is the trend, as seen in the rising unemployment rate and the drag from government layoffs; recent US ISM manufacturing and service sector PMIs also showed weakness; 3) The bigger risk is the "stagflation-like" situation caused by tariffs. Slow growth or even recession is not scary, as the Fed can quickly cut interest rates to solve most problems, as seen last year in July to September when similar situations arose due to triggering the "Sam rule." However, if the Fed is unable to cut rates due to supply-side inflation pressures (2022 pandemic, current tariffs), and can only watch growth slow down, this will not only hinder the transmission pathway of offsetting growth pressures through rate cuts, but also increase market concerns about recession or stagflation, which is the main problem caused by tariffs. Currently, the CME rate futures imply nearly a 100% probability of a rate cut in June (a 25bp cut at 61%), but inflation caused by tariffs could constrain the Fed's actions. As analyzed in the "Staggering tariffs beyond expectations," in the short term, it is important to monitor tariff developments and countermeasures, as well as potential liquidity shocks due to significant asset fluctuations.