Weak Employment Data Sparks Market Expectations Shift
Following the Federal Reserve's July meeting, the newly released U.S. July non-farm employment data fell significantly below market expectations. The number of new jobs added was only 73,000, far short of the expected 104,000, and the data for the previous two months was also substantially revised downward, with a total reduction of 258,000, marking the largest non-pandemic-related revision since 1979. This unexpected weakness brought the three-month moving average job growth down to 35,000, indicating a noticeable slowdown in the labor market.
The unemployment rate slightly rose to 4.2%, though still at a low level, its impact on the Federal Reserve's policy stance is significant. Analysts point out that this change may prompt the Fed to consider cutting interest rates at the September meeting, making it a key policy option.
Federal Reserve Faces Policy Dilemma
Although there is still one employment report and two rounds of inflation data scheduled before the September FOMC meeting, the July employment data has already altered the policy foundation. If upcoming inflation data shows that tariffs are pushing prices higher, the Fed may find itself in a "soft employment and high inflation" conundrum.
Changes in the interest rate futures market have already reflected this sentiment: following the release of non-farm data, U.S. 2-year and 10-year Treasury yields respectively fell by over 20 basis points and 10 basis points, indicating a market repricing of the likelihood of a rate cut. Expectations for a decline in short-term rates have increased markedly.
CPI Data Becomes Crucial Test
The market widely expects U.S. July CPI to rise by 0.2% month-on-month and 2.8% year-on-year, with core CPI up 0.3% month-on-month and 3.0% year-on-year. Predictions by Goldman Sachs and Bank of America show slight differences, but both believe tariffs will be a significant factor driving inflation higher, with core CPI monthly increases likely to remain between 0.3% and 0.4% in the coming months.
Analysts suggest that if CPI data exceeds expectations, it could weaken rate cut expectations and lead to a dollar rebound; conversely, it would strengthen market bets on the Federal Reserve initiating a rate cut cycle.
Investment Strategy and Market Outlook
In the bond market, short-duration strategic products like SHAG, USSH, etc., may gain relative advantage in a rate-cut environment. Fixed-income investors can moderately position themselves at this stage while maintaining liquidity to make tactical adjustments after CPI data is released.
In the short term, the dollar may be under pressure due to weak employment data, but its mid-term trend will still depend on inflation performance. Once a rate cut cycle is established, the dollar's downward trend may continue.
