Guosheng Securities believes that the true inflection point for changes in the Fed's policy space is highly likely to occur after the chairmanship transition in May. If, under Warsh’s leadership post-transition, there is a marginal adjustment in the Fed's policy stance, combined with a gradual slowdown in economic momentum in the first half of the year, the room for interest rate cuts in the second half may significantly expand.
Guosheng Securities released a research report stating that the US 'strong' non-farm payroll data and 'weak' CPI were successively announced, significantly impacting asset prices, with expectations of a Federal Reserve rate cut first cooling and then warming up again. Taken together, the weaker CPI has alleviated some of the hawkish pressure brought by the stronger-than-expected non-farm payroll data. The bank believes that: the Federal Reserve may still find it difficult to release a clear easing signal in the short term, and asset prices will continue to fluctuate around the tug-of-war between growth resilience and inflation stickiness; the true turning point for policy space is likely to occur after the Fed chair transition in May. If there is a marginal adjustment in the Fed's policy stance under Warsh’s leadership post-transition, coupled with a gradual slowdown in economic momentum in the first half of the year, the room for rate cuts in the second half may open up significantly.
The main viewpoints of Guosheng Securities are as follows:
1. CPI: January CPI was below expectations, while core CPI met expectations, with service inflation remaining highly sticky.
Overall performance: The U.S. unadjusted annual CPI for January 2026 was 2.4%, lower than expected and previous readings, marking a decline for three consecutive months since September 2025; core CPI was 2.5% annually, in line with expectations but lower than the previous reading. Seasonally adjusted monthly CPI rose 0.2%, lower than expected but matching the 12-month average of 0.2%; core CPI increased 0.3% monthly, consistent with expectations and higher than the 12-month average of 0.2%.
Sub-item performance: Regarding major sub-items of U.S. January CPI, the food sub-item fell from 3.1% in December 2025 to 2.9% annually; the energy sub-item dropped from 2.3% in December 2025 to -0.1%; the core goods sub-item declined from 1.4% in December 2025 to 1.1%; and the core services sub-item decreased from 3.0% in December 2025 to 2.9%. Within this, the housing sub-item fell from 3.2% to 3.0%, while non-housing core service inflation remained strong, with healthcare services rising from 3.5% to 3.9% annually. Notably, the super-core CPI for January recorded 0.59% month-over-month, significantly higher than the previous month's 0.23%, making it the second highest reading since January 2025.
Overall, the drop in energy prices (gasoline, fuel oil, etc.) was one of the key reasons for the overall inflation missing expectations this time. Declines in used car prices and slight moderation in housing and food inflation also exerted downward pressure on the overall CPI. However, considering that the core monthly increase remained at 0.3% and the super-core monthly figure approached 0.6%, this indicates that service inflation in the U.S. remains sticky, meaning that current inflation has not yet fully returned to a stable low level.
2. Non-farm Payroll: Employment exceeded expectations, while the unemployment rate missed forecasts; this non-farm payroll report contained considerable noise.
Overall performance: The U.S. added 130,000 non-farm jobs in January, far exceeding the expected 65,000, reaching the highest level since April 2025. The unemployment rate in January was 4.3%, below both the expected value and the previous reading of 4.4%, hitting the lowest level since September 2025. Labor participation rate in January stood at 62.5%, higher than the expected and previous values of 62.4%. Average weekly hours worked in January were 34.3, surpassing both the expected and previous readings of 34.2, showing little change since early 2024. Average hourly earnings grew 0.4% monthly, higher than both the expected and previous readings of 0.3%. Overall, this was a non-farm payroll report reflecting stronger-than-expected employment and lower-than-expected unemployment, with notable surprises in wage growth and working hours, which are linked to U.S. household consumption capacity.
Sub-item performance: Examining employment across U.S. industries in January, government employment (-42,000) remained weak, while private sector employment (+172,000) showed significant improvement, though concentrated narrowly. The education and healthcare services sector (+137,000) contributed nearly 80% of new jobs, followed by professional and business services (+34,000), construction (+33,000). Information (-12,000) and finance (-22,000) continued their negative growth trends, while manufacturing (+5,000) turned positive after 13 months. Structurally, new job creation mainly focused on relatively rigid demand sectors like education and healthcare services. Cyclical-sensitive industries such as information and finance continued to contract, while manufacturing, although slightly turning positive, showed limited recovery strength. This means that the recent improvement in U.S. non-farm payrolls relied heavily on a few sectors, with no broad-based employment rebound yet forming, though some resilience was still evident overall.
Data revisions: After the annual data revision, on an unadjusted basis, total non-farm employment as of March 2025 was revised down by 862,000 people, or 0.5%; over the past decade, the absolute average magnitude of benchmark revisions has been 0.2%. After seasonal adjustments, changes in total non-farm employment for 2025 were revised from +584,000 to +181,000. It is worth noting that in the January establishment survey, the BLS updated its birth-death model to incorporate the latest monthly sample information. This CES methodology adjustment, which now incorporates new sample information monthly, may make the model more sensitive to current employment changes, potentially amplifying estimates of new jobs during periods of employment strength. Therefore, the bank believes that the stronger-than-expected January U.S. non-farm payroll report might be partly driven by technical factors, and its reflection of actual labor market momentum needs further validation.
3. ‘Strong’ non-farm payroll, ‘weak’ CPI handoff leads to asset price fluctuations and shifting expectations for rate cuts.
Performance of major asset classes: 1) After the release of non-farm payroll data, US stocks, US bond yields, and the US Dollar Index initially rose but then fell, while gold initially dropped before rebounding. As of the close on February 12, the S&P 500, Nasdaq, and Dow Jones indices fell by 0.00%, 0.16%, and 0.13%, respectively; the 10-year US Treasury yield increased by 2.77 basis points to 4.17%; the US Dollar Index rose by 0.06% to 96.92; spot gold rose by 1.22% to $5,082.86 per ounce. 2) After the release of CPI data, US stocks initially rose before retreating, US bond yields and the US Dollar Index declined, and gold rose. As of the close on February 14, the S&P 500, Nasdaq, and Dow Jones indices changed by +0.05%, -0.22%, and +0.10%, respectively; the 10-year US Treasury yield fell by 4.79 basis points to 4.05%; the US Dollar Index dropped by 0.05% to 96.86; spot gold rose by 2.41% to $5,042.81 per ounce.
Changes in rate cut expectations: 1) After the release of non-farm payroll data, market expectations for Fed rate cuts cooled somewhat. The implied number of March rate cuts from interest rate futures essentially dropped to near zero (from 0.22 to 0.06 cuts), the implied number of June rate cuts was less than one (from 1.05 to 0.71 cuts), and the total implied number of rate cuts for 2026 decreased from 2.4 to 2.12. 2) After the release of CPI data, market expectations for Fed rate cuts slightly warmed again. The implied number of March rate cuts remained nearly flat (from 0.09 to 0.10 cuts), the implied number of June rate cuts rose from 0.81 to 0.86 cuts, and the total implied number of rate cuts for 2026 increased from 2.36 to 2.53 cuts.
4. The debate over rate cuts continues, with potential turning points likely emerging after May.
Considering both the January US non-farm payroll and CPI data, the US economy is characterized by persistent labor market resilience and sticky service sector inflation. Non-farm employment growth exceeded expectations, with wages and hours worked rising in tandem, providing short-term support to household income and consumption. However, job improvements were concentrated in a few service sectors, showing limited diffusion, and the data contained technical distortions. On inflation, the overall decline in CPI was mainly driven by energy, while core month-over-month inflation remained at 0.3%, with super-core inflation notably strong, indicating continued pressure from service sector inflation. Taken together, the weaker-than-expected CPI somewhat alleviated the hawkish pressure brought by the robust non-farm payroll data. However, the bank believes that the Fed may still struggle to send a clear easing signal in the short term, and asset prices will continue to fluctuate amid the tug-of-war between economic resilience and sticky inflation.
The true inflection point for policy space is likely to emerge after the leadership transition in May. Once the chairmanship handover is completed, if there is a marginal adjustment in the Federal Reserve’s policy stance under Warsh’s leadership, coupled with the gradual slowdown in economic momentum in the first half of the year, the scope for rate cuts in the second half may significantly open up. In 2026, the US economic fundamentals do not necessitate aggressive rate cuts, but against the backdrop of the Fed chair transition in May and the November midterm congressional elections, the Fed’s independence is being challenged. Current market expectations for about 2.5 rate cuts in 2026 align with economic fundamentals but underestimate the pricing of the Fed’s loss of independence.
Beyond the rate cut trajectory, dollar liquidity remains a focal point. After 2022, thanks to the expansion of money market funds and the once-high scale of the Fed's overnight reverse repurchase facility (ON RRP), combined with the strengthening AI narrative and capital inflows into dollar assets in a high-interest-rate environment, US equities rose accordingly, and the scale of neutral strategies and hedge funds also expanded. However, since the second half of 2025, the previously accumulated 'excess liquidity' has significantly receded, with ON RRP balances continuing to decline. The RMP operations initiated in December are expected to provide some support for reserve demand during periods of volatility, but they are unlikely to fundamentally match the expanding non-bank sector and offshore dollar financing needs. Market concerns about the 'Warsh quantitative tightening shock' can be viewed as a stress test for dollar liquidity constraints. Without substantial balance sheet expansion in 2026, basic dollar liquidity is unlikely to re-expand, and the US non-bank sector and offshore dollar system may still face periodic liquidity risks, making it difficult for volatility levels of risk assets such as the Nasdaq and commodities to retreat significantly.
Risk Warning: Continued surprises in the US economy, inflation, Fed monetary policy, and geopolitical conflicts.
Editor/Lee
