Understanding the August Nonfarm Payrolls: A Guide for Investors

The last and most important nonfarm payroll report before the September FOMC directly determines whether the 'recession panic' will intensify, and whether the Federal Reserve will cut rates by 25 basis points or 50 basis points in two weeks. However, the results left both the optimistic and pessimistic sides somewhat unsatisfied. It's true that the data isn't great, but there wasn't a direct shock that would make a 50 basis point cut a certainty.

1.The Negative Side: The number of jobs added was 142,000, lower than the expected 165,000, with last month's figure revised down from 114,000 to 89,000.

2.The Less Negative Side: Temporary unemployment decreased by 190,000, essentially offsetting the previous month's increase of 249,000. Additionally, the household survey reported an increase of 168,000 jobs, resulting in a drop in the unemployment rate from 4.3% to 4.2%. Wages showed a month-over-month rebound (monthly wage growth at 0.4%, expected 0.3%, previous 0.2%; year-over-year wage growth at 3.8%, expected 3.7%, previous 3.6%), which somewhat mitigated the situation.

As for the frequent downward revisions, I can only assume that the monthly employment data is indeed difficult to estimate accurately; they are survey-based and need more time for confirmation, especially when temporary factors are significant. This applies to all market participants because once we start assuming data quality issues, discussions become muddled.

Following the release of the data, various assets showed considerable indecision, with some diverging trends. Currently, there seems to be a consensus that the data is not as bad as feared: U.S. stocks rose, gold fell, and both the dollar and U.S. Treasury yields increased. However, by the close, U.S. stocks and gold fell while Treasuries remained stable, indicating ongoing divergence.

In terms of rate cuts, this data actually gives the Federal Reserve some breathing room. Imagine if the data had significantly exceeded expectations—would a 25 basis point cut need to be adjusted? Conversely, if the data had significantly missed expectations, forcing a 50 basis point cut could induce greater market panic. As it stands, expectations for a September cut of 25 or 50 basis points are roughly even, with the conclusion likely to hinge on next week's CPI data. Personally, I lean towards a 25 basis point cut unless absolutely necessary, as a larger cut would only reinforce recession fears.

For assets, the impact of this data is similar; there isn't much new information regarding recession or rate cuts. The market is currently in a chaotic phase of transitioning between growth and policy, with clear signs of slowing growth but yet to see the effects of policy changes. The situation isn't extremely pessimistic, but we also haven't seen encouraging signs, which makes fluctuations and indecision inevitable (similar to the experience before the July 2019 rate cut). Additionally, with the second round of presidential debates on September 10 and the rate cut on September 19 approaching, market dynamics will be further influenced.

For U.S. Treasuries and gold, they will still benefit before a rate cut, but since expectations are already well priced in, unless there's additional evidence indicating an even greater risk of recession and rate cuts, the significance of linear extrapolation is limited. After a rate cut, the economy might drive recovery in rate-sensitive sectors, so it's worth gradually considering assets that may benefit after a rate cut. This is the main reason I suggest a moderate approach of thinking and acting 'in reverse'.