August first, two thousand twenty-five
《On Forward-Looking Behavior (with a Discussion on the Jobs Report)》
《The subject problem and forward-looking behavior (with a discussion of employment data)》
Preface: This is still a gradual cooling process, not a scenario of rapid deterioration.
Please read this article alongside Notes 250707, “The Scenario of a Gradual Cooling”
I.The subject problem and forward-looking behavior
Initial reactions to the data: see https://mp.weixin.qq.com/s/AUMtOvHeP7aaSlldy4As9g，情况没那么糟糕，远到不了恐慌，从四月以来，市场持续喊降息，我们在Notes里一直在讲，还不到时候，不到时候，当时讲到的东西，到今天依然适用：
Chart: Notes 250428, “Another Counterintuitive but More Likely Combination of Macroeconomic Paths”
When discussing data, we cannot discuss only the data. For us, what matters more is making it concrete. After all, every view must ultimately be expressed through positions. In other words, what matters is where the judgments we form can give us a tangible potential edge for making money in the market...
So, when discussing data, we must first discuss the subject problem.
At this point, if we are still fixated on the Fed, we may mostly be wasting time (for further reading, see Notes 250528, “The Fed Has Been Pulled to the Very End of the Decision Chain”).The key issue can no longer be solved by whether or not to cut rates; Powell wrongly cut 100 basis points around this time last year, which only caused the 10-year Treasury yield to rise by 100 basis points.
Market participants can broadly be divided into two types: those who move ahead of the data (the trend) and use forward-looking judgments to smooth the economic cycle, and those who lag behind the data (the trend).Lagging decisions often fail to produce the positive effects their actions are intended to bring. Instead, the market prices them through a reverse logic that is completely opposite to the action itself: the more rate cuts, the more fear. This has happened repeatedly over the past several decades.
Deadlines repeatedly pushed back, vague agreement policies, fiscal policy and immigration distorting the data, and risk assets continually hitting new highs all pose challenges for forward-looking actors. Delaying uncertainty brings greater uncertainty; that is a simple causal logic.
Betting by following the lagging behavior of market participants naturally offers no market edge.
For the Fed, vague language at meetings is not deliberate; it is the result of having no other option.At this point, the Fed no longer has the ability to remove the punch bowl early or inject new momentum in advance. In fact, if it still adhered to the symmetric flexible inflation-targeting framework it previously adopted, current conditions would even call for continued substantial rate hikes..
It has clearly been sidelined when it comes to pricing power.
Current expectations and trading bias remain unchanged, the China–U.S. agreement is the last potential near-term risk point. Whatever the outcome, tariff trading will come to an end and enter its final phase; a rate cut in 9, but without causing major volatility; 10 month, 11 month, with key volatility arriving alongside effective data(growth data, not employment data)arriving together; at that point, we may see U.S. stocks fall, the dollar fall, gold rise, crude oil fall, and so on—these trades this year the point when they resume, while the end of this macro trading cycle will broadly coincide with the start of an independent move in Chinese assets. Emerging markets will also continue to outperform on a relative basis (before then, they will clear global risk assets along with market sentiment).
However, the mild-cooling scenario also means that all major swings will be retraced. This is a process of gradual pricing.
Of course, if our view changes, we will update it at any time. Maintaining a flexible stance is not a bad thing in this era.
Two. Let’s take a careful look at the data
First, it is important to clarify that what we are discussing is an economy transitioning to a state constrained by labor supply:
Chart: Labor supply is no longer growing
This means that even if nonfarm payroll growth is very small (and may be revised down substantially again in the future), the unemployment rate is still unchanged from two months ago:
Chart: The unemployment rate is actually still flat
The supply-side logic we kept discussing a few months ago is becoming reality:
Chart: Notes250608
And when the unemployment rate becomes a reassuring data point, that reassurance does not mean growth will continue
Chart: Notes250529
This logic is also becoming reality. The unemployment category most suggestive of recession—unemployment caused by permanent layoffs—remains unchanged in the latest data. As noted before, the Fed, which relies heavily on the unemployment rate, has lost its ability to look ahead.
This is also one of the main logical foundations for the assessment made earlier:
Apart from an economy “transitioning to a state constrained by labor supply,” we should not forget that the United States is also entering a period of fiscal expansion, and we live in a nominal economy:
Chart: Notes250528 “The focus may be fiscal rather than monetary: the paradox of high deficits and high interest rates”
The market continues to confirm this as fact:
Chart: Composite weekly earnings index
The composite weekly earnings index is a good monthly proxy for nominal income growth and is highly correlated with nominal GDP growth, the latest data show that the weekly earnings index grew 5.3% year over year, above 4.5% in 6, because hours worked rose while hourly wage growth remained steady.
Over the past year, the indicator’s 12-month growth rate has stayed within a narrow range of 4.5% to 5.3%, close to its pre-pandemic norm;The three-month annualized growth rate (though volatile) rebounded to 4.6% in 7, above the revised-down 2.8% for 6, which was the lowest level since the post-pandemic expansion began.
If it is not growth, then it is inflation.
Also,
the most emphasized data revisions, in fact are no longer “news” at all:
The chart above shows revisions to the data in the U.S. jobs report. In fact, the story of this round of data downgrades began as early as the end of 22, and in the past several “major” downward revisions, after the brief shock was priced in, the market generally accepted them with a relatively measured response.
There will be no liquidation-style panic.
Finally, before the weekend, here are some interesting charts for you to read and consider:
1. Is anyone still paying attention to the midterm elections?
Chart: Trump’s approval among independent voters has plunged to the lows seen during Biden’s term
2. What people really care about
Chart: Inflation vs. trade policy
Bonus: Joe’s commentary published on Bloomberg
Today’s nonfarm payroll data were poor. But that is not the whole story: they carry an ominous quality, like a glimpse of a strange future in miniature.
First, the data. The headline figures in this report are not exactly earth-shattering: payrolls rose by 7.3 ten thousand, below the expected 10.4 ten thousand, but hardly cause for the sky to fall. The unemployment rate rose to 4.2%, but that was within economists’ expectations and still normal.
However, two major “asterisks” deserve particular attention.
First, the revisions: according to the U.S. Bureau of Labor Statistics, employment growth over the past two months was overstated by 25.8. Those “robust” jobs reports after the tariffs took effect? Clearly, they were a mirage.
Second, the distribution of new jobs. The report shows that in 7, health care added 5.5 ten thousand jobs, above the average monthly increase of 4.2 ten thousand over the previous 12 months. Of these, outpatient services added 3.4 ten thousand and hospitals added 1.6 ten thousand. Employment in social assistance continued to rise, adding 1.8 ten thousand, mainly from continued growth in individual and family services (+2.1 ten thousand).
In 7, employment rose by 7.3 ten thousand, of which 7.3 ten thousand came entirely from health care and social assistance, two low-productivity sectors that grow mechanically almost every month as society ages. New jobs in other areas? At best, stagnant; more accurately, deteriorating.
As Matt Boesler pointed out, “Excluding health care, employment growth over the past three months was: 5 -5.3 ten thousand, 6 -4.5 ten thousand, and 7 -300 ten thousand.” Of course, health care and social assistance are not the only things growing in reality; the entire AI wave is also lifting the market. Just yesterday, Meta’s market capitalization increased by about 2000 hundred million dollars in a single day.
Overall, the other major tech giants are also riding more or less the same wave. This is great for shareholders and for some employees. Take Meta: it is recruiting top AI talent with pay comparable to that of professional athletes.
But setting aside this tiny handful of top AI elites, employment conditions in the tech industry are not good. Microsoft is also a major AI winner: its cloud business is growing rapidly, yet it is still laying people off.
CEO Satya Nadella even sent an internal memo saying that the pace of the company's layoffs weighed “heavily” on him.
This is a strange state of affairs: normally, when a company’s profits and share price are both soaring, people naturally assume it is expanding its hiring.
If you think carefully about the U.S. economy today, you’ll find that it has a hazy sense of the future: a tiny minority is gaining wealth (and power) across generations; the personal balance sheets of many people are improving because of the stock market’s strong performance (you could even say that, to some extent, the stock market has become a “private UBI” for those fortunate enough to get in); and the only sector adding jobs broadly is industries related to aging and health, much of which depends on expanding deficit spending.
We are not seeing a broad expansion in overall economic activity.
An occasional bad employment report is not the end of the world. It happens from time to time: people panic for a while, then forget about it. Yet the particular contours of this moment seem to foreshadow a stranger, more unsettling future.
Today’s market action is interesting. Two-year Treasury yields fell sharply (about 21 basis points), as expected, because weak data strengthened the case for earlier and deeper rate cuts. The probability of a rate cut in 9 has now risen to 88%, from less than 40% just yesterday. But the long end moved less: the 10-year yield fell only about 15 basis points. The market is telling us that even if the economy is stagnating now, economic conditions will still support higher interest rates over the long term.
In fact, this is a dilemma for both the Fed and the White House.
Today’s data undoubtedly strengthened the case for rate cuts. In fact, at 8 this morning, Fed Governor Waller issued a statement explaining why he voted for a rate cut this week, and his reasons were quite sound. But if the goal is to revive the housing market or reduce interest payments on debt (which seems to matter to Trump), it remains unclear whether rate cuts can have enough effect.
One problem is that inflation remains elevated even as the economy shows signs of weakness. There has indeed been considerable progress in curbing inflation over the past two years, but just yesterday, core PCE came in at 2.8% year over year, and the previous month’s figure was revised slightly higher.
Returning to the labor market as a whole, we cannot ignore health care and social assistance. These are real, necessary jobs and they have value. But they are low-productivity sectors, and their growth is more mechanical.
Such growth does not indicate that the economy as a whole is showing greater prosperity or vitality.
In summary, today’s report makes it easy to imagine what a stagflationary environment could look like: an economy showing only mediocre growth in many areas, yet maintaining fairly high resource utilization because of strong demand for social assistance (absorbing labor) and demand for electricity and certain industrial equipment generated by AI construction (absorbing capital).
(The above is a general translation of the full text; the original text is in the image below for everyone to read.)
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2025.08.01
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