Walsh Weakens Forward Guidance, Market Must Reprice Data, Rates, and Capital Costs

On August 7, the U.S. non-farm payroll report for July is set to be released, with the market expecting an increase of about 80,000 to 83,000 jobs and an unemployment rate holding steady at 4.2%. However, recent employment data has shown significant divergence. The number of initial jobless claims in the U.S. for the week ending August 1 fell to 199,000, remaining below 200,000 for the third consecutive week, and layoffs in July also saw a notable decrease; yet, ADP reported only 44,000 new private sector jobs, the lowest level since the beginning of the year, indicating that corporate hiring has not expanded in tandem. More importantly, the U.S. labor force participation rate has dropped to 61.5%, the lowest since March 2021, suggesting that the 4.2% unemployment rate should not be viewed solely as a sign of a strong labor market, as some stability stems from a simultaneous slowdown in labor supply.

In this context, what truly impacts the market tonight is not merely the number of new jobs added, but whether employment, wages, and the unemployment rate will simultaneously reinforce the Federal Reserve's concerns about inflation. Fed's Musalem indicated that the likelihood of inflation remaining above target is increasing and hinted at a preference for interest rate hikes during the recent FOMC meeting; the market has even begun discussing that if recent inflation data remains strong and borrowing cost expectations rise, Walsh may raise rates at the September meeting. This makes the policy linkage between employment data and inflation data even more critical.

At the same time, Walsh's weakening of forward guidance means that the market must rely more on economic data to judge the Fed's policy response function. JPMorgan CEO Dimon supports this reform, believing that re-evaluating the Fed's policy framework is significant, but he also warns that the market has accumulated substantial financing through channels such as prime brokers, hedge funds, ETFs, and Treasury arbitrage, with overall leverage still at high levels. When policy communication decreases and market leverage is high, any changes in interest rate expectations could be transmitted to asset prices more rapidly.

On the corporate side, capital cost challenges are also present. Alphabet plans to raise up to $25 billion through the issuance of investment-grade bonds, while Tesla continues to advance the construction of its Texas TeraFab, as AI and computing infrastructure still require significant capital investment; on the other hand, the Democratic Republic of the Congo has banned the export of copper and cobalt concentrates, and risks related to the Strait of Hormuz have not been fully alleviated, which may further increase infrastructure construction costs due to constraints on energy and key raw material supplies. This indicates that the global capital market is facing not only interest rate issues but also simultaneous pressures on funding, energy, and raw material costs.

For the cryptocurrency market, this environment means that highly volatile assets like Bitcoin remain highly sensitive to U.S. dollar liquidity, long-term yields, and global risk appetite. If the non-farm payroll and subsequent inflation data reinforce rate hike expectations, the pressure on the market will not only stem from the policy rate itself but also from the repricing of the overall risk-free rate and financing costs; conversely, if employment and inflation cool simultaneously, it could provide clearer policy space for risk assets. Therefore, what needs to be observed tonight is how the data will alter the Fed's response function and how this change will ultimately transmit to the U.S. dollar, long-term yields, and global capital costs.

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