Upon a close examination of the non-farm payroll data for February, we find that the employment rate in the United States may be "overstated," and the U.S. economy may have embarked on a path of "recession."

Will the Federal Reserve delay interest rate cuts again?

In recent days, a series of significant events have occurred in the U.S. economy. In addition to Federal Reserve Chairman Powell's bold appearance on Capitol Hill, the release of the February non-farm payroll data in the United States has also affected future expectations for interest rate cuts. Moreover, the sharp decline in the yield of 10-year U.S. Treasury bonds has pointed the market in a clear direction.

So, under the influence of multiple bearish factors and complex elements, what will be the future path for the United States? Until which month can we expect the United States to implement significant interest rate cuts and monetary easing?

The non-farm data is complex, and the timing of interest rate cuts continues to be postponed?

On Capitol Hill, facing inquiries from congressional members, Federal Reserve Chairman Powell finally spoke, stating that the Federal Reserve will definitely cut interest rates this year, but the specific timing for the rate cut has not been determined.

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Federal Reserve Chairman Powell: Interest rate cuts will occur this year.

After the February non-farm payroll data was released, the market went through a series of complex fluctuations and ultimately reached a conclusion: under the encroachment of multiple bearish factors, the expectation for interest rate cuts by the Federal Reserve has increased once again.

Let's look at the non-farm payroll data for the United States in February. The number of new jobs added in the United States in February was 275,000, higher than the expected 200,000.

At first glance, it seems that the U.S. non-farm employment exceeded expectations, right? It should be bearish for interest rate cuts. However, a closer look reveals that full-time employment in the United States has significantly decreased, while part-time employment has begun to increase. This actually implies that the February U.S. non-farm employment data is weak, which is conducive to interest rate cuts.Secondly, there is the unemployment rate in the United States. This time, the unemployment rate rose to 3.9%, reaching a new high since January 2022 and higher than the World Bank's expectations.

There is not much to say about this data; it essentially corroborates the employment data mentioned earlier. The U.S. economy is indeed beginning to fall into a recession, and the extremely high unemployment rate signifies the start of a "soft landing" process for the U.S. economy.

Some may wonder why, on one hand, the employment data greatly exceeded expectations, while on the other hand, the U.S. unemployment rate reached a new high. Isn't this contradictory?

To put it simply, there has been a deviation between the data from institutional surveys and household surveys. A plausible explanation is that Americans, facing inflationary pressures, are being forced to take on multiple jobs; meanwhile, the gap between wages and employment is actually widening.

In addition, the existence of the unemployment rate implies that the U.S. economy is beginning to cool down. This means that the U.S. economy is experiencing the so-called "ice and fire" scenario. The economic ice and fire scenario is also reflected strangely in the financial markets.

Firstly, there was a sudden surge in U.S. Treasury yields, rising from around 4.06% to around 4.12%. This indicated that the market believed the Federal Reserve would delay the timing of rate cuts. However, soon after, U.S. Treasury yields began to decline and continued to weaken, all the way down to 4.069% by midday on March 11.

The 10-year U.S. Treasury bond has been continuously weakening.

So, the yield on U.S. Treasuries surged and then fell. What does this mean? Initially, the financial market's judgment on non-farm data was off; they initially thought the non-farm data indicated that the U.S. economy was doing very well. However, subsequent data showed that the non-farm data for February was just a facade. The U.S. economy has actually run into problems and is beginning to decline.

The worse the U.S. economy performs, the higher the probability of the Federal Reserve cutting interest rates, which is also why the yield on the 10-year U.S. Treasury bond eventually fell.Is the US interest rate cut delayed? Investment institutions shorting US Treasury bonds?

Previously, we mentioned that the timing for the US interest rate cut was around June. According to the CME Group's FedWatch tool, the current probability of an interest rate cut in June is around 74%.

However, according to the estimates of swap traders, by July, the probability of the US maintaining its current interest rate is less than 8.2%, which can be said to indicate that there is a very high probability that the US will indeed cut interest rates. The first interest rate cut in July has been fully priced into the market.

Upon closer examination, the interest rate cut in June has effectively become a July interest rate cut, which in fact has been postponed by another month, and the 4% yield on US Treasury bonds also proves this point.

Based on such a forecast, Barclays Bank stated that investors should short the 10-year US Treasury bonds because, although the US economy is relatively strong, due to the previous over-reaction of US Treasury bonds, it still recommends shorting the 10-year US Treasury bonds.

If we further overlay the "hollow" February non-farm report and the fact that the US is entering a recession, then it is even more appropriate to short US Treasury bonds and sell them. We will also see the situation of the People's Bank of China selling US Treasury bonds in three months.

The patience of the Federal Reserve is much greater than we think.

Here is a question: Why does the Federal Reserve want to cut interest rates in July under multiple bearish factors for the US? In fact, the patience of the Federal Reserve is much greater than ours.

Firstly, Powell firmly believes that the current inflation is still higher than the long-term target of 2%, so the US inflation crisis has not been resolved. Only when it approaches around 2% will the US cut interest rates.

Secondly, the Federal Reserve is weighing the timing of the interest rate cut. It currently has a lot of confidence in a soft landing for the US economy, but when to cut interest rates? The best time would be to coincide with a recession time point.One of the nodes is the interest rate cut node given by the market, which is the aforementioned July. There is also a second time node, which is September of this year.

After September, according to the US ISM employment rate, it will drop below 45, which means the US economy officially enters a recession cycle. So Powell may also choose to start cutting interest rates in September to officially hedge against the impact of the US economic recession.

In summary, although interest rate cuts do help the recovery of the US economy and even the world economy, the patience of the Federal Reserve may be much greater than we think. Unless inflation reaches close to 2%, interest rate cuts? Not a chance.

Summary

Combining the non-farm data in February and Powell's testimony, the number of employed people in the United States seems to exceed expectations, but in fact, there are problems. It reflects the decrease in full-time employment in the United States, the increase in part-time employment, and the continuous rise in the unemployment rate.

Under such circumstances, the market's probability of interest rate cuts in June is less than 60%, and only the probability of interest rate cuts in July can reach as high as 90%. So in my opinion, there is a probability of interest rate cuts in June, but in fact, it is postponed to July.

Mass layoffs in US companies

Not only that, but the technology and financial industries in the United States have already started large-scale layoffs, and layoffs in other industries are also being summarized, which means that the US economy has officially entered a "soft landing" state. The global economic recession mentioned in 2024 may already be on the way.

Of course, even if the United States starts to decline, the patience of the Federal Reserve is much stronger than everyone imagines. Without an inflation rate of 2%, the United States is estimated not to cut interest rates. When will the Federal Reserve cut interest rates? We still have to look at the old American's face.