The August non-farm payrolls report will not only be the final word on the Federal Reserve’s September interest rate decision, but will also provide key clues as to whether the U.S. is heading for a recession.
The August non-farm payrolls report to be released tonight may be one of the most important US non-farm reports in years. This report will not only "finalize" the Fed's September interest rate decision, but also provide key clues as to whether the world's largest economy is entering a recession.
At 20:30 Beijing time, the U.S. Bureau of Labor Statistics will release the August non-farm report. According to the consensus expectations of economists surveyed by Bloomberg:
Nonfarm payrolls are expected to increase by 165,000 in August, a sharp rebound from 114,000 in July.
The unemployment rate fell from 4.3% to 4.2%, the first decline since March this year; the year-on-year increase in hourly wages rose from 3.6% to 3.7%.
Wall Street expects a 25 basis point rate cut in September if August nonfarm payrolls are strong, but a 50 basis point cut could be in the offing if the data is weak or the unemployment rate soars.
In addition, if the unemployment rate in August continues its upward trend in July, analysts may become increasingly concerned that the United States may be in the early stages of a recession or on the brink of a recession. But if the unemployment rate falls or remains stable as Wall Street predicts, then the weak non-farm payrolls in July may be seen as a false alarm.
Whether the United States is in recession depends on unemployment rate
The unemployment rate will be the highlight of tonight's non-farm report, providing key clues as to whether the United States is entering a recession.
As of July, the U.S. unemployment rate has risen from 3.4% in April 2023 to 4.3%, even higher than the level before the epidemic in 2020. More importantly, the unemployment rate in July triggered the Sam rule, causing recession panic to spread wantonly.
If the unemployment rate in August continues its upward trend from July, analysts may become increasingly concerned that the U.S. may be in the early stages of a recession, or on the brink of one. But if the unemployment rate falls or remains stable, as Wall Street predicts, then the weak July non-farm payrolls may be seen as a false alarm.
Large and rapid increases in unemployment rarely occur outside of a recession, which is why the recent rise in unemployment has attracted so much attention.
Other signs of a slowing labor market have fueled recession fears. After surging in 2021 and 2022, job openings have been falling steadily and are near pre-pandemic levels.
However, some analysts believe that the job market has not collapsed, but has returned to normal after strong growth in labor demand. For example, the surge in non-agricultural unemployment in July was mainly related to temporary factors such as immigration, hurricanes, and extreme high temperatures.
David Mericle, chief U.S. economist at Goldman Sachs, believes that the job market will get better, and labor demand is returning to normal after a very hot period, but it will not be completely frozen. "It looks more like 2019 and stronger than 2022."
Jobless claims, while up, remain low, and WARN notices, which warn of large layoffs, have yet to surge, according to Goldman Sachs.
Claudia Sahm, the author of the Sam Rule and chief economist of New Century Advisors, also believes that the US economy is not in recession and that the rising unemployment rate is partly due to the fact that many new people are entering the job market and taking a long time to find a job.
According to Goldman Sachs' latest forward-looking report, non-farm payrolls increased by 133,000 in August, lower than market expectations and slower than the previous value.
Goldman Sachs pointed out that the main reasons for the slowdown in employment include: historical August data tends to be biased, job vacancy indicators other than JOLTS (job vacancies fell in July) are high, and the impact of the US workers' strike continues. However, Goldman Sachs also said that the improvement of extreme weather is conducive to the rebound of the job market.
25 or 50, the August non-agricultural data is the final word
Given that the trend of slowing inflation has been established, coupled with the recent statements of senior Fed officials, a rate cut in September is almost certain. The biggest disagreement at present is whether to cut interest rates by 25 basis points or 50 basis points. The CME FedWatch tool shows that the probability of the two happening is 41% and 59% respectively.
Overnight, the ADP employment report, known as the "small non-farm payrolls," unexpectedly hit a three-and-a-half-year low, raising expectations for a 50-basis-point rate cut. Some analysts believe that the Fed must cut interest rates at a faster pace to prevent the labor market from worsening.
The Fed's attention has completely turned to employment, so the August report of non-farm payrolls, as the most important indicator of the US labor market, is likely to be the final word on the extent of the September rate cut. It is generally predicted that if the August non-farm payrolls data is strong, the interest rate will be cut by 25 basis points in September, but if the data is weak or the unemployment rate soars, the rate cut may be 50 basis points.
Among them, Goldman Sachs' Treasury trading team wrote:
If the unemployment rate falls to 4.19% or lower, there is hope for a 25 basis point rate cut in September as long as the new employment data is positive.
The unemployment rate remains between 4.20-4.29%. If new employment exceeds 150,000, the interest rate will be cut by 25 basis points in September, and if it is less than 150,000, the interest rate will be cut by 50 basis points.
If the unemployment rate remains at 4.30% or rises, a 50 basis point rate cut will be implemented in September.
At the Jackson Hole global central bank conference, Fed Chairman Jerome Powell said "now is the time for a policy adjustment" with a focus on the labor market, especially after the July jobs report, adding that "we neither seek nor welcome further cooling in the labor market."
It is worth mentioning that Friday is also the last day for public communication before the start of the Fed's quiet period. New York Fed President John Williams and Federal Reserve Board member Christopher Waller will speak after the release of the non-farm report on Friday. This is the last opportunity for the market to price in the September interest rate decision.
Julia Coronado, founder of research firm MacroPolicy Perspectives, said:
(August non-farm payrolls) is very important. It will set the tone for the Federal Reserve, and it will also set the tone for global monetary policy and markets.
The market is ready!
JPMorgan Chase believes that the impact of the August non-farm payrolls report on the market depends on the employment growth data in the report. According to a report released by JPMorgan Chase's market intelligence team:
If the number of new jobs exceeds 300,000, which is a tail risk scenario, the market may rule out expectations of interest rate cuts, causing U.S. Treasury yields to rise and putting pressure on risky assets.
An increase of 200,000 to 300,000 jobs would boost market confidence in the economic outlook and could push the S&P 500 up 1% to 1.5%.
Job growth is between 150,000 and 200,000, which is basically in line with market expectations. If the unemployment rate does not continue to rise, the S&P 500 index may rise by 0.75% to 1.25%.
With job growth between 50k and 150k, the market will worry about a recession and will quickly reach a consensus on a 50bp rate cut in September, which could result in a 0.5% to 1% decline in the S&P 500.
Job growth below 50,000 is also a tail risk scenario, where the market may believe that the U.S. has entered a recession and may even begin to expect a 75 basis point rate cut in September and a 1.25% to 2% drop in the S&P 500.
JPMorgan Chase expects that if the employment data meets expectations, the market may rise due to the increase in expectations of rate cuts. Since the Fed previously misjudged that inflation was temporary, they are now more likely to choose to cut interest rates in advance when considering the risks of recession or re-inflation.