The most important non-farm payrolls: whether it will drop by 25 or 50 basis points depends on tonight

The August non-farm payrolls report released tonight may be one of the most important US non-farm reports in many years. This report will not only "finalize" the Federal Reserve'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 US Bureau of Labor Statistics will release the August non-farm report. According to the consensus expectations of economists surveyed by Bloomberg:

The number of new non-farm jobs in August is expected to reach 165,000, 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 non-farm payrolls are strong, but a 50 basis point cut could be in the works if the data is weak or unemployment soars.

In addition, if the unemployment rate in August continues its upward trend in 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 could be seen as a false alarm.

Whether the U.S. is in recession depends on the unemployment rate

The unemployment rate will be the highlight of tonight's non-farm report, providing key clues to whether the U.S. 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 pre-epidemic level in 2020. More importantly, the July unemployment rate triggered the Sam's rule, causing recession fears to spread wildly.

If the unemployment rate in August continues the upward trend in July, analysts may become increasingly worried that the United States may be in the early stages of a recession, or on the verge of a recession. But if the unemployment rate falls or remains stable as Wall Street predicts, then the weakness of non-agricultural employment in July may be regarded as a false alarm.

The sharp and rapid rise in the unemployment rate rarely occurs outside of a recession, which is why the recent rise in the unemployment rate has attracted so much attention.

Other signs of a slowing labor market have fueled recession concerns. After soaring in 2021 and 2022, job vacancies have been steadily declining and are close to pre-epidemic 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-farm unemployment in July was mainly related to temporary factors such as immigration, hurricanes, and extreme high temperature weather.

Goldman Sachs Chief U.S. Economist David Mericle 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."

Although the number of applications for unemployment benefits has increased, it is still low. Goldman Sachs data shows that WARN notices, which warn of large-scale layoffs in advance, have not increased significantly.

Claudia Sahm, the author of the Sam's Rule and chief economist of New Century Consulting, also believes that the US economy is not in recession. The reason for the increase in unemployment is partly because many newcomers have entered the job market and it took them a long time to find a job.

According to Goldman Sachs' latest forward-looking report, non-agricultural employment in August was 133,000, which was lower than the market's general expectations and also slowed down compared with 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 (July job vacancies fell), and the impact of US workers' strikes continues. However, Goldman Sachs also said that the improvement of extreme weather is conducive to a rebound in the job market.

25 or 50, the August non-farm payrolls "have 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 a foregone conclusion. 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 each happening is 41% and 59%, respectively.

Overnight, the ADP new employment, known as the "small non-farm payrolls", unexpectedly hit a three-and-a-half-year low, and expectations for a 50 basis point rate cut have increased. 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 interest 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, as long as the new employment data is positive, the interest rate is expected to be cut by 25 basis points in September.

• The unemployment rate remains between 4.20-4.29%. If the number of new jobs exceeds 150,000, the interest rate will be cut by 25 basis points in September, and by 50 basis points if it is below 150,000.

• If the unemployment rate remains at 4.30% or rises, the interest rate will be cut by 50 basis points in September.

At the Jackson Hole Global Central Bank Conference, Federal Reserve Chairman Powell said that "now is the time to adjust policy", focusing on the labor market, especially after the release of the July employment report, and added that "we neither seek nor welcome further cooling of the labor market."

It is worth mentioning that Friday is also the last day for public communication before the start of the Fed's silent period. New York Fed President John Williams and Federal Reserve Governor Christopher Waller will speak after the release of the non-farm report on Friday, which 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) is very important. This will set the tone for the Federal Reserve, and will also set the tone for global monetary policy and markets.

The market is on high alert!

JPMorgan believes that the impact of the August non-farm payrolls report on the market depends on the data on job growth in the report. According to a report released by JPMorgan's market intelligence team:

• If the number of new jobs exceeds 300,000, it is a tail risk scenario, and the market may exclude the expectation of a rate cut, resulting in an increase in U.S. bond yields and pressure on risky assets.

• The number of new jobs between 200,000 and 300,000 will increase market confidence in the economic outlook and may push the S&P 500 up 1% to 1.5%.

• Job growth between 150,000 and 200,000 is basically in line with market expectations. If the unemployment rate does not continue to rise, the S&P 500 may rise by 0.75% to 1.25%.

• Job growth between 50,000 and 150,000 will cause the market to worry about a recession, and the market will quickly reach a consensus on the 50 basis point rate cut in September, which may cause the S&P 500 to fall by 0.5% to 1%.

• Job growth below 50,000 is also a tail risk scenario, and the market may believe that the United States has entered a recession, and may even begin to expect a 75 basis point rate cut in September, with the S&P 500 falling 1.25% to 2%.

JPMorgan Chase expects that if the employment data meets expectations, the market may rise due to increased expectations of rate cuts. Since the Fed's previous misjudgment of inflation was temporary, they are now more likely to choose to cut interest rates in advance when considering the risk of recession or re-inflation.