Huaxi Securities Co.,Ltd. released a research report stating that on September 5, the US Department of Labor released August non-farm data showing non-farm employment increased by 22,000, below the estimated 75,000. July was revised up by 6,000 to 73,000, while June was revised down by 40,000 to -13,000. The unemployment rate was 4.3%, in line with market expectations, compared to the previous 4.2%. Following the data release, gold rose over 1%, and the 10-year US Treasury yield fell about 10bp to 4.06%. How should we view the impact of this non-farm data?

**First, non-farm employment continues to weaken, with markets expecting consecutive rate cuts in September, October, and December**

August non-farm data continued the weakness seen from May to July, with only 22,000 new non-farm jobs added. The four-month average is 27,000, compared to the 150,000 average from May 2024 to April 2025. The labor market's job creation capacity is "precarious," with the private sector adding an average of only 39,000 jobs over the past four months, the weakest period since the pandemic (compared to the 46,000 average from June-August before last year's rate cuts). Not only non-farm data, but previously released job openings, ADP employment, Challenger layoffs, and unemployment claims data all consistently point to labor market weakness. Current employment data contradictions dominate, so we won't elaborate further on structural data.

As a result, market expectations for rate cuts this year have risen from about 60bp to 72bp, meaning markets are betting on 25bp cuts at all three remaining Fed meetings (September 18, October 30, and December 11 Beijing time).

**Second, unemployment rate and wages also support rate cuts**

Since February this year, the unemployment rate has oscillated narrowly in the 4.1-4.2% range. August unemployment reached 4.32%, up 0.08 percentage points from the previous month, the highest level since 2021. The Fed's June meeting projected this year's unemployment rate at 4.5%, so 4.3% remains slightly below that level. Meanwhile, the unemployment rate rose a combined 0.2 percentage points in July-August, more stable than the second half of last year (before the Fed's September rate cut last year, the July-August unemployment rate triggered the "Sahm Rule," where the 3-month moving average unemployment rate minus the previous year's low exceeded 0.5%, historically corresponding to economic recession).

This reflects synchronized slowdown in US labor market supply and demand this year, with private sector job creation slowing while immigration restrictions weakened labor supply. Regarding wages, August hourly earnings rose 0.28% month-over-month, corresponding to an annual rate of about 3.3%. The four-month average is 0.29% (about 3.6% annualized). Compared to the 0.32% four-month average (about 3.9% annualized) before September rate cuts last year, current hourly earnings growth is lower. Therefore, both unemployment rate and hourly earnings data support Fed rate cuts.

**Third, have rate cut expectations reached extremes? They may continue to heat up**

Two major upcoming data releases deserve attention: First, on September 9, the BLS will release the preliminary annual benchmark revision for non-farm employment (April 2024 to March 2025). If annual employment revisions exceed expectations on the downside, it could intensify concerns about labor market weakness. Second, CPI data released on September 11 - only inflation below expectations could further boost rate cut expectations.

If subsequent data all point to US economic downside risks, rate cut expectations may further rise to the 75-100bp range. Does this mean that after September rate cuts, October and December cuts will also materialize? The answer is uncertain. October rate cut probability is relatively higher, while December certainty is lower.

Since October 2023, the US has experienced multiple similar situations. If markets price in excessive rate cut expectations and bond yields fall sharply, reducing the restrictive effect of market rates on inflation, it could actually create acceleration risks for inflation. A typical example was the second half of last year - after the Fed cut rates 100bp across three meetings, the disinflationary process stalled, forcing continued pause in rate cuts.

If markets aggressively price in 75-100bp of rate cuts this year, history may repeat. Moreover, current conditions face not only persistently high services inflation but also potential tariff transmission to retail prices, making the inflation situation more complex than last year. Therefore, after rate cut expectations cooled continuously from May-July this year, August-October represents a heating-up phase, with high probabilities for September and October cuts. But November-December may see renewed cooling of rate cut expectations, making December meeting cuts harder to predict.

**Fourth, for various asset classes, recession trades may marginally heat up but are unlikely to dominate, potentially replaced by stagflation concerns**

Following non-farm data release, US bond yields generally fell 10bp+, the dollar dropped nearly 0.5%, gold rose over 1%, and US stocks declined slightly. These market movements point to economic slowdown concerns overshadowing rising rate cut expectations. Risks of US stocks turning to recession trades are heating up, but subsequent stagflation risk trading may be more likely.

On one hand, given labor market and consumption weakness, US economic slowdown direction is relatively certain, while tariffs and AI capital expenditure promoting domestic US investment can only partially offset consumption slowdown impacts. On the other hand, while wage growth pressure from labor markets eases, price transmission from tariff increases and persistently high fiscal deficits mean US disinflation conditions are more complex. In this environment, rising rate cut expectations may catalyze secondary inflation risks.

In a quasi-stagflationary environment, gold has relative advantages while also benefiting from declining Fed independence. Equity asset volatility increases, but anti-inflation properties remain superior, with technology sectors relatively insensitive to economic cycles potentially maintaining excess returns. For US Treasuries, short-end rate certainty is higher than long-end rates. This year's 10-year Treasury yields may maintain range-bound fluctuations rather than trending downward. Ten-year and longer Treasury yields face not only potential inflation risk impacts but also negative effects from weakening Fed independence and external drag from ultra-long bond volatility in Europe, UK, and Japan.