Sinolink: Song Xuetao - Non-agricultural cold smoke rises, interest rate cut autumn wind urgent.

The initial response rate of the August US non-farm payroll survey rebounded significantly, and doubts about data quality have also dissipated somewhat, but the trend of deteriorating employment has not stopped. After excluding education and healthcare, the private sector, which is more sensitive to the cycle, has seen continuous job contraction for four months. What is more bleak is that the total non-farm payroll increase in the past four months (May-August) was only 107,000, lower than the average monthly growth level in the first four months of 2025 (127,000); and the revised June non-farm payroll recorded a decrease of 13,000, seeing job contraction after 52 months. The unemployment rate in August jumped from 4.248% last month to 4.324%, mainly due to a slight recovery in labor force participation rate; with weak supply and demand, it is possible that the peculiar structure of suppressing unemployment rate through supply may be approaching a turning point, just like Powell's concern about the sharp increase in layoffs before, the weakening demand is prevailing. The balance being gradually disrupted also means that the Fed's forecast of a 4.5% unemployment rate by the year-end is likely to be raised at the September FOMC meeting. The US labor market data since the July FOMC has undergone a 'sea-change': non-farm payroll increase in the two reports has been revised downwards by 279,000 people, and the unemployment rate has increased by 0.21%. This makes the Fed's policymakers, aside from Bowman and Waller, think: has the Fed fallen behind the curve? Do we need additional rate cuts in September as 'compensation' for not cutting rates in July? Especially after Powell publicly turned dovish, the other officials do not have the 'psychological burden' of shifting. For example, Kansas Fed President Schmidt stated in an August interview that there is no need to adjust interest rates, claiming that he hasn't seen any interest rate restrictions (I don't know exactly what we are restricting), but the subsequently released Beige Book showed that the employment situation in the Kansas Fed district is the worst in the US. At the same time, the San Francisco Fed and New York Fed regional businesses have expressed a deterioration in the labor market in the Beige Book, considering the size and sensitivity of the two regions' economies; from the perspective of corporate perception, the arrival of the low point in the employment cycle may not have been seen yet. Considering the factor of tariffs, the future of the US labor force is even more worrying. For US companies, tariffs have become a certainty, the rise in production costs is gradually becoming clearer, and the expectation is that the tariff pressure on future industries will increase further; apart from raising prices, the most direct solution is to reduce labor costs. This will manifest as hiring lower-cost part-time workers, freezing recruitment, and layoffs. Recent times have shown a combination of 'decline in full-time employment, increase in part-time employment, and increase in permanent unemployment', accumulating greater risks of rising unemployment rate, as it is always easier to lay off part-time employees. Although the overall average weekly working hours in non-farm jobs have not decreased further, the manufacturing sector, which is most sensitive to tariffs, has seen a continuous decline in working hours since reaching a peak in May-June; coupled with weak manufacturing employment, and the lag effect of rate cuts on economic stimulus, employment situations in both rate-sensitive and tariff-sensitive sectors may further decline. Structurally, the most sensitive U6 unemployment rate and the unemployment rate of African Americans have shown significant increases, while the proportion of long-term unemployed (more than 27 weeks) is still rising, these are all sources of vulnerability. It is difficult to determine whether the negative growth in June is the cyclical low point of the US non-farm sector, we tend to favor the view that there is a greater risk of the unemployment rate rising, and the probability of a two-stage decline (negative growth) in employment in the cycle-sensitive private sector cannot be ignored. The current market is not very actively involved in recession trading, mainly because Powell has shown a 'bottoming commitment' to the labor market at the Jackson Hole conference. But the specific path corresponding to this attitude is not clear, that is, how to balance the 'bottoming' and 'stimulus' of the labor market. The former implies that maintaining employment at a low level of 50-100,000 people is sufficient to achieve the goal, and substantial rate cuts by the Fed are not necessary; the latter requires a trend reversal to be seen, which would require a larger or more consistent rate cuts. Considering Trump's greater control over the Federal Reserve Board, continuous rate cuts by the Fed not only do not have economic pressure, but also have stronger political motivation; this is also the reason why the market remains relatively optimistic, betting on larger rate cuts if the economy worsens. But if the Fed cuts rates by 25bp in the September FOMC meeting, while still maintaining the expected total of 50bp rate cuts for the year, this may damage Powell's credibility of 'bottoming promise', and may in turn be a prelude to starting recession trading in the future. Lastly, whether it is tax cuts, rate cuts, or increased investment in AI, stimulus to employment has a lag. Even if total employment is stabilized, the US labor market is facing greater structural problems: young people with skills but no experience continue to struggle to find work (rising unemployment rate), and skilled but undocumented immigrants are too afraid to work after Trump's inauguration (decline in employment numbers). It is foreseeable that the trend of rising unemployment rate is difficult to end, even if the US economy ultimately does not enter a recession, for the young people and undocumented immigrants in the US, they are already experiencing an economic downturn. Risk warning Increased policy uncertainty from Trump leads to more pronounced market volatility; the global economy is increasingly affected as tariffs become clearer, global synchronized easing in the second half of the year exceeds expectations, significantly easing pressure on long-term interest rates; technological breakthroughs lead to intensified reshoring in manufacturing, significantly reducing US production costs, and a significant increase in credit demand. This article is from the "Xue Tao Macro Notes" public account. GMTEight Editor: Jiang Yuanhua.