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According to a research report released by Guojin Securities, the switch between supply-side and demand-side narration in the labor market determinesMame32onlineWhich of the upside risks to inflation or downside risks to growth will prevail, as well as the direction of Fed policy. The bank believes that both improved supply and weaker demand will lead to rising unemployment, which have different implications for the economy and assets, but the same meaning for the Fed's rate cut. If the unemployment rate rises above 4%, interest rate cuts will come. If there is no financial systemic risk, it can be regarded as "false decline". In the nine recessions in history, the unemployment rate has risen at least 1.Mame32online.5 percentage points, corresponding to at least 5% upstream this time.
The main points of Guojin Securities are as follows:
If the US unemployment rate rises to 4%, the "last kilometer" of the equalization of the US labor market
(1) Employment and growth: the labor market supports "half the sky" of the US economy, and there is still a downward range in the growth rate of labor wages and consumption.
The labour market is the hub that connects economic growth with inflation. In terms of growth, until the labour market has cooled or is likely to cool significantly, the basic market of the US economy may be stable-the probability of a "hard landing" is relatively low. A simple explanation is that the US is an economy dominated by personal consumption (PCE). This dominant position can be summarized as "two 70%": PCE accounts for 70% of GDP and services account for 70% of PCE.
Income "determines" consumption, and employee compensation accounts for more than 60% of income. As of April 2024, the growth rate of employee compensation had slowed to 5.6%, of which employment contributed 1.6 percentage points, or 29%, significantly lower than the 50% in the early days of the recovery. Looking ahead, employee compensation growth is likely to continue as both job creation and average hourly wage growth slow, but this is only a return to normal levels before 2020 (there is still 1 percentage point of room to return).
(II) Employment and inflation: Labor market resilience, inflation stickiness and the Federal Reserve's "balancing act"
Labor market slack (slackness) is the leading indicator of wages, and wage growth is highly positively correlated with core service inflation. In the medium term, wages or the core inflation center is the main influencing factor. The labour market conditions index (LMCI) is 12 months ahead of wage growth. The correlation coefficient between wage growth and core service inflation is 0.85. As LMCI is still in a downward range, we tend to believe that the downward trend in wage growth is more difficult to falsify in the short term.
Loose or tight trading has entered a stalemate. In the short term, the marginal tightening of the Fed's policy stance and the possibility of 10-year US Treasury interest rates rising are dominant, but the 4.7% rise in 10y US bond interest rates still needs to be boosted by cost-side or liquidity factors such as crude oil prices. At the regular meeting in June, the Fed will most likely raise the interest rate cut curve, two times is the benchmark scenario, and we should pay more attention to the distribution of the bitmap. The first rate cut before September is still our benchmark scenario, cutting interest rates 1 or 2 times a year.
(3) equalization of the "last kilometer": the labor market is still in line with the "supply-side narrative", and the weakening margin is the mean return.
The switch between supply-side and demand-side narrative in the labor market determines which of the upside risks of inflation or the downside risks of growth will prevail, as well as the policy direction of the Federal Reserve. So far, the supply side has improved or is coming to an end, and signs of weakening marginal demand continue. In terms of trend, there is a higher probability that the labor market will continue to loose. Empirically, the current implied unemployment rate in LMCI is 4.1 per cent (the official U3 unemployment rate is 3.9 per cent).
Both improved supply and weaker demand will lead to rising unemployment, which have different implications for the economy and assets, but the same meaning for the Fed's interest rate cut. If the unemployment rate rises above 4% and interest rates are about to be cut, should there be a soft landing or a trading recession? If there is no financial systemic risk, it can be regarded as "false decline". In the nine recessions in history, the unemployment rate has risen by at least 1.5 percentage points, corresponding to at least 5% this time.