Global Finance Watch: US Economy Soft Landing Amid Stable Jobs Market?

Last Friday, the U.S. Department of Labor released the employment market conditions for September, with 254,000 new jobs added in September, higher than the expected 147,000, and the unemployment rate dropped from 4.2% in August to 4.1%. The report once again proves that the Federal Reserve may have made a misjudgment, and the interest rate cut of 50 basis points last month was somewhat hasty.

Driven by the triple benefits of the artificial intelligence investment boom, cooling inflation, and expectations of interest rate cuts, as of October 4th, the S&P 500 index has risen by 20.57% this year, the Dow Jones Industrial Average, which is mainly composed of blue-chip stocks, has increased by 12.37%, and the technology stock-focused Nasdaq index has risen by 20.83%. The U.S. Dollar Index closed at 102.275, up 0.52% from the previous trading day; the yield on the ten-year Treasury note closed at 3.969%, up 3.21% from the previous trading day, indicating that the market believes the Federal Reserve will cut interest rates by 25 basis points on November 7th.

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The employment market is stable, and the Federal Reserve is overly concerned.

Federal Reserve Chairman Powell has repeatedly stated that on November 7th, he will play by the usual rules (cutting by 25 basis points), and emphasized that the Federal Reserve's 50 basis point cut in September was to maintain the good momentum of the employment market. In fact, Powell and the Open Market Operations Committee misjudged the employment situation at the time, were frightened by the employment report in July, lost their due composure, and hastily decided on a large interest rate cut based on only two months of data. As shown in the figure, the current employment situation in the United States is the same as in the previous quarters. After all, many companies are preparing for the Christmas shopping season, and layoffs are limited to certain industries, which are not enough to affect the entire economy.

The employment report shows that the new employment positions added by industries in September are also exactly the same as before. In the goods production sector, only the construction industry added 25,000 jobs, while the manufacturing industry laid off 7,000 people; the service industry added 202,000 jobs, of which the retail industry added 15,600, health care and social work added 72,000, and accommodation and catering added 76,000; the government sector added 31,000. However, most of them are low-paying jobs, and there are fewer high-paying jobs.

U.S. stock financing is not active, and bond financing is normal.

The U.S. stock market has been active in trading this year, but the issuance market has been lukewarm. In the first three quarters of this year, U.S. companies raised $155.3 billion through equity financing, higher than the $107.7 billion in the same period last year, but it is likely to be lower than the normal year level. Among them, new share issuance was $25.8 billion, higher than the $17.5 billion in the same period last year; additional share financing was $109.8 billion, also higher than last year's $79 billion.

The U.S. corporate bond issuance market has been more active this year. In the first three quarters, U.S. corporate bond issuance amounted to $1.57 trillion (exceeding last year's total), compared to $1.18 trillion in the same period last year. The impact of the Federal Reserve's interest rate cut on short-term interest rates is immediate, but the impact on medium and long-term interest rates is smaller, and the interest rate inversion is being repaired.Financial markets have reached a fundamental consensus: inflation has become a thing of the past, and a soft economic landing may become a reality. However, this does not mean that inflation will not rebound. On September 27th, the core Personal Consumption Expenditure (PCE) index, which the Federal Reserve refers to in its decision-making, was announced by the US Department of Commerce to have risen by 2.7%, slightly higher than the 2.6% in August. If the situation in the Middle East continues to deteriorate and the Israel-Iran conflict escalates, crude oil prices will inevitably rise, putting pressure on prices. Additionally, the recently concluded dockworkers' strike will affect the nationwide wage costs in the United States, all of which are potential risks for an inflation rebound.

After more than three years of inflation, the general public has suffered greatly. High prices have eroded the purchasing power of household incomes, contradicting the situation reflected in statistical data. According to Federal Reserve data, the median price of a US home was $221,000 in 2009, rising to $412,000 in 2024. According to the US Department of Energy, the average price of a new car was $23,276 in 2009, now rising to $48,000. If calculated based on CPI increases, the housing price should be $322,000, and the new car should be $34,000.

Furthermore, the total debt of the US federal government is growing out of control and is about to reach $36 trillion. At the beginning of August this year, the total debt of the US federal government just exceeded $35 trillion, and in just over two months, it has now reached $36.68 trillion, equivalent to the economic scale of a moderately wealthy country.

The decline in price increases, but the high level of prices, makes ordinary families feel financially drained. The indiscriminate issuance of various subsidies by the US government is bound to let the debt scale get out of control. High debt levels are probably the deepest contradiction faced by the US economy, which will severely limit future economic growth and continuously weaken the national strength of the United States.

The future monetary policy of the United States has been clarified, but there are many variables in the financial market.

The biggest recent event is the result of the US election on November 5th: who will enter the White House? Which party will control the House of Representatives? Which party will control the Senate? The election results will produce new uncertainties. For example, will US foreign policy change? How will domestic economic policies be adjusted? Because the US president has the highest decision-making power in foreign affairs, changes in foreign policy will have a significant impact on international affairs, while the president's domestic policies are more constrained and policy adjustments take a longer time.

In terms of macroeconomics, the CPI data to be announced by the US Department of Labor on October 10th is relatively important, and the preliminary estimate of GDP growth for the third quarter announced by the US Department of Commerce on October 30th is quite important. These macroeconomic indicators will have a certain impact on the financial market, but the most important information comes from the quarterly earnings reports of US companies. Among them, the performance of technology stocks will determine the direction of the stock market, and the market most wants to know whether the application of artificial intelligence has improved corporate operational efficiency. Has the cloud revenue of Microsoft, Google, Amazon, and META (Facebook) increased significantly? Has Apple's operational indicators improved?

After the release of the non-farm employment report, the financial market has formed a strong expectation: the Federal Reserve will cut interest rates by 25 basis points on November 7th, and will continue to cut interest rates on December 28th. Changes in the bond market are worth paying attention to. Will the interest rates of medium and long-term US bonds continue to rise? Will the interest rate inversion continue to improve? Does it predict an economic recession? Although the market unanimously believes that the US economy may achieve a soft landing, many people disagree, believing that the US economy is strong and inflation has not been completely controlled. Considering various domestic and international factors, inflation is very likely to "reignite", and the US economy may "not land" (no landing).

The Federal Reserve may cut interest rates by 25 basis points on November 7th, which has been reflected in the exchange rate market, with the US dollar appreciating against non-US dollar currencies. Among them, the exchange rate of the US dollar against the Japanese yen fluctuates more violently. On October 4th, the US dollar appreciated by 1.22% against the Japanese yen (which is quite rare in the foreign exchange market).