On October 4th, the U.S. Department of Labor released a rather "explosive" non-farm employment report.

The non-farm employment figure for September increased by 254,000, significantly surpassing the market's expectation of around 150,000.

Moreover, traditionally, when the U.S. releases the non-farm employment numbers for the current month, it also significantly revises the numbers for the past two months downward.

However, this time it was unusual as it resulted in a significant upward revision for the numbers of the past two months.

The non-farm employment increase for July was revised up from the original 89,000 to 144,000;

For August, it was revised up from 142,000 to 159,000.

Although it is widely known that the U.S. non-farm data can be easily manipulated,

Especially in August this year, the U.S. Department of Labor officially revised last year's non-farm employment significantly downward by 818,000, essentially making it clear that the U.S. manipulates the non-farm data.

But this explosive non-farm employment data still caused significant fluctuations in the U.S. financial market.

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The market's expectation for a 50 basis point rate cut by the Federal Reserve in November has significantly cooled down.The FedWatch tool from the Chicago Mercantile Exchange (CME) indicates that before the data release, the market expected a more than 30% chance of a 50 basis point rate cut by the Federal Reserve in November. However, after the data was announced, the market expectation for a 50 basis point rate cut in November essentially dropped to zero, with a 97.4% probability expected for a 25 basis point rate cut.

Influenced by the cooling market expectations for a 50 basis point rate cut by the Federal Reserve in November, the US Dollar Index experienced an uptick, while other non-US currencies depreciated.

It has to be said that the United States has a pretty effective system for managing expectations and manipulating data.

Even though the market is well aware that the US non-farm payroll data is unreliable, the announcement of these figures still carries significant influence.

I have analyzed the intricacies of this situation several times.

The fact that the United States fabricates data and that these data can impact the market are not conflicting matters.

Market investors do not necessarily believe that these economic data from the United States are genuine. Rather, as stakeholders in the market, they need to understand the direction of such expectation management, which is akin to the direction of a conductor's baton. This serves as a coded language to bring order to the chaotic financial market, creating an "ordered flow."

Once such a flow emerges, it will sweep along market capital, moving in the direction desired by the Federal Reserve.The economic data released by the United States, along with the Federal Reserve's decisions to raise or lower interest rates, are all part of the conductor's baton.

The Federal Reserve uses the baton to strengthen and alter market expectations, guiding them consistently in the direction of the baton.

This is actually the core of expectation management.

This is also why, even if the market knows full well that these data are fabricated, they still wield significant influence.

From this perspective, we need to use these published data as a window to explore the true intentions of the Federal Reserve's baton.

For example, in the first half of the year, the U.S. consistently released positive non-farm data, only to significantly revise it downward after a couple of months, indicating that the U.S. was embellishing the data, which also suggested that the Federal Reserve had no intention of lowering interest rates.

Then, starting from early August, the U.S. released poor non-farm data, indicating that the Federal Reserve was preparing to lower interest rates.

As expected, in September, the Federal Reserve proceeded with the rate cut.

Here, we must also avoid reversing cause and effect.

It is not the case that the Federal Reserve releases poor economic data in order to lower interest rates, which would imply that the U.S. economy is actually doing very well.To be precise, the United States is no longer even pretending; it has directly released data that is slightly more truthful. This is to provide some justification for the Federal Reserve to lower interest rates. After the Federal Reserve achieved its goal of a significant interest rate cut of 50 basis points in September, in order to dispel market concerns about a U.S. economic recession, it quickly released relatively favorable economic data this month. This is because the Federal Reserve cannot simply lower interest rates by 50 basis points without any reason; doing so might trigger market panic.

Just as the Federal Reserve's aggressive interest rate hikes in 2022 required high inflation as a rationale, this significant interest rate cut also needs a reason, such as an increase in the unemployment rate. The Federal Reserve needs these justifications to back up its operations, allowing it to pass the buck and avoid responsibility. For instance, if inflation rises, the Federal Reserve is forced to raise interest rates, and the negative consequences of those rate hikes cannot be blamed on the Federal Reserve.

However, a significant reason for the high inflation in the United States in 2022 was the Federal Reserve's unlimited money printing in 2020. So, when you delve into the causes, the responsibility still lies with the Federal Reserve, and it cannot be shirked. Yet, most people do not delve into these details, providing room for the Federal Reserve to pass the buck.

For another example, the unemployment rate released by the United States on the 4th for September was 4.1%, which continued to decline slightly by 0.1% compared to the previous month.In early August, the U.S. unemployment rate rose significantly to 4.3%, triggering market concerns about a recession in the U.S. economy, which in turn reinforced market expectations for a 50 basis point rate cut in September.

However, after the Federal Reserve cut rates by 50 basis points as expected in September, the unemployment rate quietly declined. But the interest rates that had already been lowered obviously could not be immediately raised back up. At the same time, the decline in unemployment rate and the unexpected increase in non-farm data also dispelled market concerns about a recession in the U.S. economy.

Through this series of data manipulation and expectation management, the Federal Reserve has achieved its goal of a significant rate cut while avoiding market concerns about a recession in the U.S. economy.

However, behind this series of operations by the Federal Reserve, careful thought reveals many issues.

1. After the increase in non-farm employment data and the decline in unemployment data, the market did not eliminate expectations for a Federal Reserve rate cut in November, but only eliminated expectations for a continued 50 basis point rate cut in November, but still expected the Federal Reserve to cut rates by 25 basis points in November.

It is also expected that there will be a continued rate cut of 25 basis points in December.

This indicates that although the market follows the Federal Reserve's baton, it still has little confidence in the Federal Reserve and the U.S. economy.

If the market really had confidence, it should expect the Federal Reserve not to cut rates.2. Amid market expectations that the Federal Reserve will continue to lower interest rates, the rise in the US Dollar Index is somewhat suspiciously enticing.

In the cycle of Federal Reserve rate cuts, from a broader trend perspective, the US Dollar Index is highly likely to enter a downward channel.

3. If the Federal Reserve lowers rates twice more in November and December as expected, US inflation may enter a rebound cycle in the first half of next year.

Should US inflation rebound, it could potentially force the Federal Reserve to halt rate cuts and even possibly raise rates again, which is what I have been referring to as the Federal Reserve potentially entering a "sit-up" phase.

4. The Federal Reserve's rate cuts have already indicated that the US is not very resilient in the face of high interest rates, as evidenced by some data.

The US government's interest expenditure over the past year has reached 1.1 trillion US dollars. Meanwhile, the fiscal revenue of the US last year was 4.4 trillion US dollars.

This means that the US government's annual interest expenditure now accounts for 25% of fiscal revenue.

Additionally, although the Federal Reserve significantly lowered rates by 50 basis points on September 18th, the US overnight funding rate saw a surge at the end of September, indicating that after maintaining high interest rates for an extended period, the US financial market has begun to show signs of liquidity tension.

In a report on October 2nd, Reuters mentioned, "A key US overnight funding rate jumped on Monday, indicating a tightening of liquidity in the money market at the end of the month and the third quarter."Data released by the Federal Reserve Bank of New York on Tuesday showed that the Secured Overnight Financing Rate (SOFR), which measures the cost of borrowing overnight cash collateralized by U.S. Treasury securities, rose from 4.84% over the weekend to 4.96% on September 30th.

This marks the largest single-day increase since March 2020, unaffected by any changes in the Federal Reserve's interest rate movements.

Meanwhile, the DTCC GCF Repo Index, which tracks the daily average interest rate of the most actively traded General Collateral Finance (GCF) repurchase agreements in U.S. Treasury securities, rose to 5.221% on Monday, about 32 basis points higher than the IORB.

The report suggests that the surge in repurchase agreement prices may indicate a cash shortage in Wall Street's key financing markets.

The report also mentions the liquidity crisis that erupted in the United States in September 2019.

At that time, the U.S. overnight financing rate once soared to 10%, significantly breaking through the Federal Reserve's interest rate corridor, forcing the Federal Reserve to urgently expand its balance sheet by $500 billion to cover up that liquidity crisis.

Although the U.S. overnight financing rate this time only rose to 4.96%, this increase is not enough to trigger a liquidity crisis.

If the 2019 liquidity crisis were to repeat itself, with the overnight financing rate rising to 10%, the Federal Reserve would likely have urgently expanded its balance sheet.

But regardless, after the Federal Reserve has just significantly lowered interest rates by 50 basis points, the U.S. still experiences a surge in short-term interest rates, indicating that the liquidity in the U.S. financial market is relatively tight, and there are some negative signals.Let's consider this in reverse: if the Federal Reserve had not made a significant interest rate cut of 50 basis points on September 18th, the surge in short-term interest rates at the end of September might have been much greater than what we saw.

This also explains why, despite a series of economic data released in early September that had already dispelled market expectations for a 50 basis point rate cut in September, the Federal Reserve still used some media outlets to reinforce the market's expectation of a 50 basis point rate cut, and ultimately delivered it.

The reason is that the U.S. financial market can no longer sustain high interest rates; the U.S. can't hold on any longer.