In the current global financial markets, two starkly different macroeconomic narratives are colliding intensely.

According to a research report dated August 14th, markets are simultaneously digesting two seemingly contradictory expectations: on one hand, the Federal Reserve is poised to implement aggressive monetary easing policies, while on the other hand, the global economy is steadily moving toward recovery.

These two expectations cannot coexist indefinitely, and the next U.S. employment report is likely to become the key catalyst that breaks the current fragile market equilibrium. The upcoming U.S. non-farm payrolls report will be released on Friday, September 5th.

**Conflicting Signals: Rate Cut Expectations Alongside Risk Appetite**

Market behavior is filled with contradictions, as observed by analysts.

According to CME FedWatch tool data, market pricing implies a 6% probability of a 50 basis point rate cut at the Fed's September meeting. Some officials, including Treasury Secretary Bessent, have begun publicly calling for a 50 basis point rate cut. These expectations have driven broad-based dollar weakness.

However, simultaneously, U.S. equity markets have reached consecutive record highs over the past two days. More notably, the market rally is not driven by a handful of tech giants but shows broader recovery signals. Particularly, economically sensitive small-cap stocks (represented by the Russell 2000 index) and consumer-related sectors have performed strongly, emerging market equities have remained resilient, and Bitcoin prices have touched historic highs. This reflects growing market participant expectations for macroeconomic improvement.

This situation of "betting on easing with one hand and growth with the other" has filled markets with uncertainty. The market pricing for significant rate cuts appears more like purchasing "insurance" against potential downside risks in economic data. Ultimately, whether the economic recovery narrative prevails or recession concerns materializing into rate cut expectations will likely be revealed soon.

**Decisive Moment: One Employment Report to Determine Asset Flows**

The core thesis is that markets cannot forever "have it both ways." The next U.S. employment report will force investors to choose between "rate cuts" and "recovery" scenarios, potentially triggering significant capital rotation.

**Scenario One: Disappointing Employment Report** If data falls below expectations, the global economic recovery narrative will "lose credibility." Market expectations for aggressive Fed rate cuts would be reinforced, with capital potentially quickly exiting cyclical assets and flowing back into bonds and technology stocks, with the latter becoming market leaders once again.

**Scenario Two: Solid Employment Report** If data confirms continued economic strength, market expectations for "excessive" rate cuts will rapidly diminish. In this scenario, capital rotation may occur from previously high-flying technology stocks toward cyclical stocks more closely tied to economic recovery.

The previous non-farm payrolls report was particularly weak, with July non-farm employment additions of only 73,000, far below expectations, and significant downward revisions of 258,000 for the previous two months.

**Japanese Assets as Potential "Winners" of Recovery Expectations**

For global investors, Japanese markets present potential opportunities.

Analysis reveals a high correlation between the dollar-denominated TOPIX index and the U.S. Russell 2000 small-cap index. The Russell 2000 has recently reached new highs for the year, approaching historical peaks, driven by both liquidity easing and expectations for macroeconomic improvement.

Therefore, if global economic recovery expectations ultimately prevail, Japanese equity markets are likely to become "strong-performing assets." Additionally, compared to U.S. technology stocks, Japanese tech stocks possess stronger cyclical characteristics and relatively lagging valuations. Under global economic recovery expectations, this valuation gap may be bridged. Simultaneously, in such an environment, Japanese bond markets may experience a "bear flatten" trajectory.