July nonfarm payrolls posted negative growth, significantly easing near-term rate hike risks; inflation remains the key focus

Last Friday (August 7), the U.S. released its July nonfarm payrolls report, showing a decline of 23,000 jobs—far below expectations—and downward revisions of 103,000 combined for May and June. The three-month average job gain has been only about 20,000. Hourly earnings rose just 0.1% month-over-month, and the year-over-year rate fell from 3.4% to 3.15%, indicating continued deceleration in wage growth momentum. Although the unemployment rate dipped to 4.1%, this was primarily due to a decline in labor force participation.

Analysis: Weaker employment eases near-term rate hike pressure, but inflation remains the true focal point

Structurally, this weak jobs report does not reflect a broad-based deterioration:

– Weakness was concentrated mainly in local government education services (−50,000, partly influenced by seasonal factors) and leisure & hospitality (−40,000, possibly suppressed by high oil prices dampening travel demand).

– Private-sector employment actually increased by 30,000, with construction (+22,000), professional and business services (+18,000), and healthcare (+22,000) still posting gains.

– The drop in the unemployment rate stemmed largely from reduced labor supply, consistent with a 'labor supply shock' rather than a sharp collapse in demand.

Among these indicators, the hourly earnings data sent the clearest dovish signal. Further slowing in wage growth suggests that even amid constrained labor supply, there is currently no significant pass-through into cost-push inflationary pressure. This further reduces the urgency for the Fed to hike rates in the near term. Additionally:

– Only one more jobs report will be released before September; barring a substantial upward revision, it will be difficult to justify a Fed rate hike amid an average monthly job gain of just 20,000.

– The Fed’s October meeting falls just one week before the U.S. midterm elections, making a rate hike politically more challenging. Consequently, market pricing for a rate hike before October—which had been relatively high—has significantly diminished, and the most likely timing for the next hike has shifted toward December.

However, inflation remains the true key. The Federal Reserve is currently more focused on prices than employment, and the July Consumer Price Index (CPI), due for release this week (August 12), will be the core variable determining the policy path.

Monthly change in nonfarm payrolls (in thousands)

Investment strategy view: Use a short-duration strategy as a common framework to effectively contain interest rate risk.

In an environment of heightened uncertainty around the interest rate path, we continue to use a short-duration strategy as the common framework to effectively contain interest rate risk:

– Core: Maintain money market funds and short-duration, high-quality investment-grade bond strategies to lock in relatively certain yields while reducing exposure to interest rate volatility.

– Credit allocation: Continue with a selective credit approach—allocating over 70% to high-quality investment-grade (IG) and short-duration assets as the defensive component; the remainder, under controlled risk parameters, may be allocated to credits with sound fundamentals and room for spread tightening as the opportunistic component (particularly high-quality Asian credits) to enhance portfolio risk-adjusted returns.

– Avoid: Excessively extending duration (to mitigate interest rate risk) or concentrating exposure in highly valued growth assets (e.g., AI-related names, which have recently experienced heightened volatility).

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