Summary of Key Points
The unexpected decline in U.S. non-farm payroll employment data in July (a decrease rather than an increase) significantly reduced market expectations for a Federal Reserve interest rate hike in September, leading the S&P 500 index to break through a months-long deadlock and reach a record high. Experts analyze that while the fundamentals of the U.S. stock market are strong, the market may have previously been overly concerned about rate hikes. American consumption is currently supported by the "wealth effect" generated by rising stock prices, but the savings rate has dropped to levels seen before the subprime mortgage crisis, posing potential risks.
1. Why Did Non-Farm Payroll Data Boost the Stock Market?
In simple terms: Poor employment figures → No Fed rate hike → Rising stock market.
Non-farm payroll employment not only failed to increase but actually decreased by 23,000 in July; previous data for May and June were also revised downward. This indicates that the U.S. job market is beginning to cool down, suggesting that the economy may not be as strong as previously thought. The purpose of Fed rate hikes is to curb inflation by slowing down economic growth. Since the economy has already slowed, the need for a hike has diminished.
The market's reaction was immediate: Before the data was released, the probability of a September hike was still relatively high (45%), but after the release, it soared above 60%. Investors fear rate hikes because they make saving more attractive and reduce the stock market's appeal. With these expectations fading, funds flowed into the stock market, driving the S&P 500 to new highs.
2. Was the Market Overestimating the Likelihood of a Rate Hike?
Experts agree that the market's concerns about rate hikes were perhaps excessive.
For example, BCA's Pita noted that the money market had anticipated two rate hikes (each of 25 basis points) within the next year, but in reality, there may only be one. Why?
- Slowing Wage Growth: The three wage indicators monitored by the Fed have returned to the 3%-3.5% range, which, combined with productivity growth, is sufficient to achieve the 2% inflation target without the need for rate hikes.
- Declining Commodity and Rent Prices: The impact of tariffs has subsided, leading to falling commodity prices. The housing market also has a surplus of unsold homes, which will continue to pressure rent levels downward. These factors reduce inflationary pressures.
Therefore, the previously feared "hawkish" rate hikes may have been unfounded.
3. What Are the Disagreements Within the Fed Regarding Rate Hikes?
At the July meeting, 9 members voted in favor of no hike, while 3 opposed it—the largest divergence since 2016.
- Hawkish Officials: Some, like Governor Powell, fear repeating the mistakes of 2021 (when too long was waited before raising rates, leading to soaring inflation). St. Louis Fed Chairman Muscallem even favored a hike in July, arguing that a gradual increase is better than a later, more aggressive one, and that tolerating higher inflation could damage the Fed's credibility.
- Dovish (Rate Hike-Averse) Officials: Although they didn't explicitly state it, their views may gain momentum after the non-farm data release, given the weak employment figures. A further hike could harm the economy.
However, with the surprising poor non-farm data, the balance of opinion is likely shifting towards no hike.
4. Can a Rising Stock Market Support Consumption, but Is a Low Savings Rate a Time Bomb?
American consumption is currently sustained by the "wealth effect," but this comes with risks:
- What is the Wealth Effect? Rising stock prices increase people's asset values, making them feel wealthier and more willing to spend, even if their actual income hasn't increased. For example, household stock assets in the U.S. now account for three times their disposable income, and more middle-class individuals are investing in stocks, directly boosting consumption.
- The Concern: Income growth is failing to keep up with spending. After adjusting for inflation, real income growth is negative (-0.4%), while spending growth is 2.3%, resulting in a savings rate of 2.8%—the lowest level since the subprime crisis. This means that consumption is driven by perceived wealth rather than actual income increases.
- The Double-Edged Sword: If the stock market declines and people's wealth shrinks, they will be less inclined to spend, potentially causing a economic downturn. Given the high level of stock ownership, the impact could be more severe than in the past.
In Conclusion
The good news for the U.S. stock market is that the pressure for rate hikes has eased, and corporate profits are strong. The bad news is that consumption is supported by the stock market, and a low savings rate makes the economy vulnerable to shocks. For individual investors, the market may continue to rise in the short term, but they should be cautious of the risks associated with the "wealth effect"—as it can be both a boon and a curse.
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