Silver Securities: Labor data with doubts can support a 0.25% Fed rate cut in September?

Zhitong Caijing APP learned that Silver Securities, a Chinese securities company, released a research report stating that non-agricultural employment added fewer jobs than expected, and the previous value unexpectedly fell by 258,000 people, with an unemployment rate of 4.25%, and average hourly earnings rose to 3.91%. The quality of labor data is worrying, but the current weakening degree of the labor market may not support a 0.25% Fed rate cut in September. The labor market's contribution to consumption remains stable, and there has been no significant weakening before the FOMC meeting in September.

Main opinions of Silver Securities are as follows:

New non-agricultural employment added fewer jobs than expected, with a previous value unexpectedly falling by 258,000 people, unemployment rate rising to 4.25%, and average hourly earnings rising to 3.91%: According to the establishment survey, 7 million new job vacancies were created in July, less than the market's expectation of 11 million; employment in June fell sharply from 14.7 million to 1.4 million, with a cumulative fall of 258,000 jobs. Non-agricultural hourly wages increased by 0.33%, and household survey showed unemployment rate rising to 4.248% (previous value 4.117%), labor participation rate falling to 62.2%. In July 2025, the total number of full-time employment in households increased by 437,000 people after decreasing by 440,000 people in June, with part-time employment continuing to decline by 367,000 people.

Labor data quality is worrying, but labor market weakening degree may not support a 0.25% Fed rate cut: The sharp fall in new non-agricultural employment in May and June has led to the three-month average of job vacancies entering the theoretical range for stable unemployment rate increase (i.e., less than approximately 700,000 jobs per month). Considering recent GDP data, it is clear that the actual economic growth momentum has weakened in the United States, but with inflation rising in the third quarter and tariffs continuing to rise, the Fed remains stuck between two difficult choices.

Notice: (1) Employment and demand are still weakening; (2) The degree of labor market weakening is still limited, making it unlikely that employment data can support a 0.25% Fed rate cut in September, even with tariffs increasing uncertainty; (3) Labor data quality has further deteriorated, with more doubts and fluctuations, which makes it less favorable for the Fed to rely solely on labor data to make decisions. Considering all this, although the labor market weakened significantly in July, it is still a warning that there may not be a first-rate cut in September.

Uncertainties in data: The explanation by BLS for the downward revision mainly involves seasonal factors and subsequent survey results showing employment decline, but actually, it is not difficult to see that more than half of the June downward revision came from non-normal "state and local government education jobs", which are not affected by corporate birth and death models and have limited impact from seasonal adjustments. Therefore, the government data does not seem clear as to why employment suddenly fell so sharply.

Labor data quality is reducing labor data's effectiveness in supporting Fed decisions: Although Silver Securities previously continued to point out that non-agricultural employment exists high estimates, the cumulative downward revision of 258,000 jobs is an abnormal event (excluding months with exceptional events and weather) in this dataset. Silver Securities tends to view this month's downward revision and previous high estimates as exaggerated, but the data reflects not only the further weakening of the labor market but also the worsening quality problem of BLS labor data, which makes it less favorable for the Fed to rely solely on data to make decisions. Considering factors such as wage growth, uncertainty surrounding tariffs, and inflation rising in the third quarter, it may still be difficult for the Fed to smoothly cut interest rates in September.

Labor market's contribution to consumption remains stable, and unemployment rate before the FOMC meeting may not decrease: Immigration supply is weakening, preventing unemployment from rapidly increasing, while wage growth and nominal total wages are stable, indicating that labor market's contribution to consumption continues. The economy has not worsened enough to require the Fed to immediately cut interest rates. From data on immigrant numbers and non-native born labor force in the United States, Trump's term has seen a trend of weakening immigration supply, combined with declining labor participation rate, which benefits maintaining relatively low unemployment rates.

Overall, the US economy is slowing down, but there is no worsening to require a rate cut in September. Silver Securities agrees with Chairman Powell's supportive view on cutting interest rates, but from the perspective of most officials, including Federal Reserve officials, it seems reasonable to delay observation in this situation where data quality is poor.

Market expectations are greatly increased for rate cuts: The dollar asset has quickly priced in the rising expectation of rate cuts and economic slowdown. CME data shows that Fed fund futures traders expect three consecutive rate cuts in September, October, and December, with a cumulative 75 BP decrease, significantly higher than the previous probability of rate cuts after the July FOMC meeting. Asset-wise, S&P 500, NASDAQ, and Dow Jones indices have all fallen sharply; 10-year Treasury yields fell by 14.62 BP to 4.222%, while 2-year yields fell by 25.49 BP to 3.702%. The dollar index has fallen to 98.6900.

Asset-wise, Silver Securities still believes that the US stock market may experience a correction in the third quarter due to high valuations and possible downward revisions in nominal profits; long-term Treasury yields may still approach 4.0% by year-end if yields temporarily exceed 4.5%, providing trading opportunities.

Risk warnings: The risk of immigration policy tightening affecting labor supply; the risk of tariffs impacting US total demand; and the risk of labor market statistics being affected by errors in different statistical sequences