The latest employment and inflation data disclosed by the U.S. Department of Labor show that non-farm payrolls in the U.S. increased by 151,000 in February, slightly below the market expectation of 160,000, with the previous value being revised down from 143,000 to 125,000. The unemployment rate rose to 4.1%, higher than the market expectation of 4%. Employment growth was mainly concentrated in healthcare, transportation, and finance, while growth in manufacturing and retail was relatively weak.
In terms of inflation, the U.S. Consumer Price Index (CPI) in February rose by 0.2% month-on-month and 2.8% year-on-year; excluding food and energy, the core CPI increased by 0.2% month-on-month, with a year-on-year increase of 3.1%, both below market expectations. This marks the first retreat of U.S. inflation after a four-month rebound, alleviating some market concerns about persistent U.S. inflation.
As a result, market expectations for the Federal Reserve to restart rate cuts have heated up. The CME "FedWatch" data showed that, before the CPI data was released, there was a 97% probability of the Federal Reserve keeping rates unchanged in March and a 67% probability of maintaining the current rate until May, with a 32.1% chance of a 25 basis point cut. After the data release, the probability of a May rate cut rose to 38.4%. The market widely anticipates that the Federal Reserve will hold steady in the March 18-19 meeting and might start a rate cut as early as the third quarter.
Policy Outlook Remains Uncertain
Despite data showing a weakening economy with inflation and employment figures, some analysts believe the Fed may still adopt a cautious stance. He Ning, the chief macroeconomic analyst at Open Source Securities, pointed out that the impact of government layoffs in the February non-farm employment data has not been fully reflected, indicating potential challenges in the job market ahead. Additionally, the inflation pressure from U.S. tariff policies has not fully manifested, and the Fed still needs time to assess policy effects.
Shao Jiewen, macro analyst at CICC Research Department, stated that the slowdown in overall U.S. demand, coupled with the decline in oil and airfare prices, helps ease inflation pressure. However, since the inflation level remains above the Fed's 2% target, the Fed may not rush to cut rates in the short term but continue to observe economic data changes in the coming months.
Goldman Sachs projects that by December 2025, the U.S. core CPI year-on-year growth rate will remain at 3.2%, while the core PCE growth rate may be 2.9%. This forecast implies that even if the Fed takes rate-cutting measures, inflation might stay elevated for an extended period.
Market Anticipation Intensifies, Timing to "Bottom Fish" U.S. Stocks Not Yet Arrived
Influenced by changes in Fed rate cut expectations, overseas financial markets have experienced increased volatility recently. Xiong Yuan, chief economist at Guosheng Securities, noted that since late February, the market's expectation for Fed rate cuts has risen from one to three times, mainly affected by the decline in U.S. stocks and the "Federal Reserve Put" effect. However, if the U.S. recession expectations are disproven, combined with a second wave of inflation pressure, the market may again lower its rate cut expectations.
Cui Rong, chief overseas research analyst at CITIC Securities, indicated that the cautious sentiment in overseas markets may persist until April, and there is no need to rush to "bottom fish" in U.S. stocks. In the current context of unresolved inflation and uncertain economic growth, U.S. bond trading opportunities may be more attractive, while U.S. stock valuations could face phase-adjustment risks. Additionally, the dollar may maintain a volatile trend influenced by European fiscal expansion.
Wang Hao, co-chief macro analyst at Guotai Junan, warned that currently, both U.S. stock and bond markets exhibit "recession trade" characteristics, and one should be cautious of a potential "stagflation trade" in the second quarter that might trigger a simultaneous decline in stocks and bonds. A new round of "recovery trade" might have to wait until after mid-year.
