For investors in the global market, perhaps no "off farm night" in the past few years has received as much attention from all parties as tonight
On the one hand, as Federal Reserve officials shift the focus of monetary policy from curbing inflation to preventing employment declines, the influence of non farm payroll data on financial markets has gradually surpassed that of CPI, which was more emphasized during the pandemic; On the other hand, people just experienced an epic "Black Monday" triggered by sluggish non farm payroll data last month, and many are still in shock to this day.
Meanwhile, in terms of timing, tonight's off farm night is almost destined to play an unusually crucial role in determining the extent of the Federal Reserve's interest rate cut later this month. Even Nick Timiraos, a Federal Reserve mouthpiece journalist known as the "New Federal Reserve News Agency," emphasized the importance of tonight's data in the morning of Beijing time with the title "August Employment Report Will Affect the Federal Reserve's September Interest Rate Reduction".
Timiraos mentioned that a robust employment report may prompt officials to initiate a 25 basis point rate cut cycle. If recruitment is weak or unemployment rates soar (as in July), it may lead to even greater interest rate cuts. In addition, Friday is also the last day for Federal Reserve officials to communicate publicly before the self established pre meeting quiet period begins. New York Fed President John Williams and Fed Governor Christopher Waller will give speeches on Friday after the release of the non farm payroll report, which will be the last opportunity for Fed officials to convey expectations to the market before the upcoming September meeting.
So, on this big day that can be considered as the "Heavenly King Mountain Battle" in the stock, bond, and foreign exchange markets tonight, what kind of answer will the US non farm payroll data in August give to the market? Will data performance continue to explode like last month? How will the market trends of various asset classes go tonight?
Let's take a good inventory before tonight:
Non farm Outlook: What is the median market forecast for tonight?
According to the median forecast compiled by economists in the industry, the number of non farm payroll jobs in the United States for August is expected to increase by 165000 at 20:30 Beijing time, significantly higher than the previous value of 114000. The unemployment rate is expected to slightly decrease from 4.3% in the previous month to 4.2%. In terms of salary data, the average hourly wage in July is expected to increase by 3.7% year-on-year, higher than the previous value of 3.6%, and is expected to increase by 0.3% month on month, compared to the previous value of 0.2%.
Due to the current stable downward trend of inflation in the United States, the importance of hourly wage indicators in non farm payroll data will no longer be as prominent as in previous years. The two core concerns of tonight's non farm night actually only need to be focused on the non farm homeowner indicators and unemployment rate.
At present, in terms of investment banking, the lowest forecast for non farm main indicators is 100000 people (made by Landesbank BW), and the highest forecast is 208000 people (from Regions Bank).
It is worth noting that the two major Wall Street investment banks, Goldman Sachs and JPMorgan Chase, have both released employment forecasts that are lower than market consensus expectations (155000 and 150000 respectively). As for whether or not to trust these two investment banks, investors may decide for themselves (according to Zerohedge, both banks have poor non farm payroll forecast records in the past year).
From a seasonal perspective, there has been a relatively unfavorable phenomenon in the non farm payroll data for August in the past. Adam Button, an analyst at the financial website Forexlive, pointed out that in 17 out of the past 23 years of August reports, the pre correction non farm payroll data for August (i.e. preliminary data released on the day of the non farm payroll) was lower than expected. Afterwards, the non farm payroll data for August is often revised upwards in multiple rounds of revisions. According to statistics, the initial weakness of non farm payroll data in August is often reflected in many similar industries - information, professional services, manufacturing, and retail. Economists warn that the situation in these industries on Friday is worth paying attention to.
In terms of unemployment rate, the industry expects the US unemployment rate to fall to 4.2% in August this time.
Previously, the unexpected rise of the US unemployment rate to 4.3% in July had triggered the "Sam's Rule" that foreshadowed economic data.
What needs to be reminded to investors now is that even if the unemployment rate falls by 4.2% as expected in August, it will still be above the warning line that triggers the "Sam's rule", and even the difference between the "Sam's rule" will further rise to 0.56%, mainly due to the impact of the increase in the benchmark base. The 'Sam's Rule' refers to the possibility of a US economic recession if the three-month moving average of the unemployment rate exceeds the lowest three-month moving average of the past 12 months by 0.5 percentage points or more.
Looking back on this week: Leading indicators in the job market have planted hidden dangers
In previous non farm "super weeks", the labor market indicators released by the US government and private organizations are actually far more than just non farm. Therefore, observing some US employment indicators that are released first in the current week can often provide early predictions for the specific performance of non farm sectors. However, for this week, the performance of a series of leading indicators for US employment does not seem optimistic.
The latest bad news came on Thursday, when employment data processing company ADP released "small non farm" ADP data showing that private sector employment growth in August was only 99000 people, the smallest increase since January 2021.
ADP Chief Economist Nela Richardson stated that after two years of significant growth, the downward trend in the US job market has resulted in slower than normal recruitment rates. The next noteworthy indicator is wage growth, which is stabilizing after a significant slowdown following the pandemic.
Forexlive analyst Adam Button also stated that there is increasing evidence that the US job market is cooling down. Due to unwillingness to completely lay off employees, the company is reducing its recruitment scale to cope with high costs and high interest rates. The latest private employment data further confirms the slowdown in labor demand, which helps to further curb price pressures.
Besides small-scale farmers, the latest layoffs are also worrying. The number of layoffs by challenger companies in the United States for August, announced on Thursday, reached 75891, far higher than the 25885 in July, with a month on month increase of 193%, the highest data since August 2009, when the economy was still recovering from the most severe impact of the global financial crisis.
Andrew Challenger, Senior Vice President of Challenger Enterprises, said, "The surge in layoffs in August reflects growing economic uncertainty, and the company is facing multiple pressures ranging from rising operating costs to concerns about potential economic slowdown. Moreover, the current trend of layoffs is very similar to last year, as the ongoing pressure challenges the company's workforce decisions
On Wednesday of this week, the US July job vacancy data, which the Federal Reserve is particularly concerned about, also fell to its lowest level since early 2021, consistent with other signs of slowing labor demand.
The few pieces of good news for the US labor market this week may come from first-time applicants. The data released on Thursday showed that the initial application for unemployment benefits last week was 227000, which is basically consistent with the expected 230000. The number of first-time applicants who did not undergo seasonal surveys even dropped to 189000, reaching the lowest point in nearly 10 months. The renewal data has also dropped to a low point in the past three months.
Perhaps it is the negative impact of most of the aforementioned US employment leading indicators that led Goldman Sachs to lower tonight's non farm payroll forecast compared to market consensus expectations. The leading indicators tracked by Goldman Sachs show a median increase of only 133000 in non farm payroll, although its own forecast (155000) is slightly higher than this number.
How will the financial market spend the non farm night tonight?
We have already introduced to investors how the global stock, bond, and foreign exchange markets are facing a major challenge with tonight's non farm payroll data in our morning report, so we will not elaborate further here.
In summary, the impact of tonight's data on the market is relatively clear, roughly stating that "good data equals good news, and bad data equals bad news" - this logic applies to US stocks, bond yields, and the US dollar.
As for the impact on Federal Reserve decisions, as stated by the New Federal Reserve News Agency, if there is no indication that the employment weakness revealed in July will continue into August, Federal Reserve officials may oppose a 50 basis point rate cut this month. If the August employment report released this Friday shows that the unemployment rate is rising again and employment growth is slowing down and accelerating, several officials who were open to cutting interest rates at the latest Federal Reserve meeting at the end of July may support a 50 basis point rate cut in September, and their opinions will also receive broader support.
In terms of specific market trends, JPMorgan Chase has listed five possible types of market conditions for different non farm payroll data performances tonight in its latest report:
① Non farm payroll exceeding 300000 people (probability 5%): This is a low probability tail risk scenario. The last time people saw non farm payroll exceeding expectations by more than 150000 people was on February 2nd, when the S&P 500 index and Nasdaq 100 index rose 1.1% and 1.7% respectively. In this scenario, we may see that as US bond yields soar, the market quickly rules out the possibility of a 50 basis point rate cut in September. In this case, hourly wage will be the key to assessing whether unexpected changes in the labor market coincide with a resurgence of wage inflation. The resurgence of bond yields may become a resistance to stock market gains, but the improvement in economic growth will ultimately benefit risk assets. Overall, the S&P 500 index is expected to rise by 0.25% -0.50% under this scenario.
② Non farm growth between 200000 and 300000 (probability 25%): Given the current highest market expectation of 208000, non farm growth in this range will be higher than most market expectations, which will rebuild growth confidence from August's data. Recent GDP, expenditure, and inflation data may be reassuring to see that the high real GDP growth experienced last year is still continuing. However, the warming of average hourly wage data may reignite concerns about wage inflation. In addition, if the data is at the top of the range, it may bring the expected rate cut for September to 25 basis points and bring the expected rate cut for the year back to 75 basis points (currently the market expectation is 110 basis points). Overall, the S&P 500 index is expected to rise by 1.00% -1.50% under this scenario.
③ Non farm growth is between 150000 and 200000 (probability 40%). This situation is basically consistent with market expectations. Xiaomo's own prediction is to create 150000 new job opportunities and maintain an unemployment rate of 4.3%. Considering the strong trend in labor supply and the weak demand for labor, this situation will be more in line with the Federal Reserve's expectation of a 50 basis point interest rate cut at its September meeting. Even if the data ultimately falls within the upper limit of this forecast range, JPMorgan believes that given weak labor demand and the apparent control of core inflation, the Federal Reserve will cut interest rates by 50 basis points in September. Overall, the S&P 500 index is expected to rise by 0.75% -1.25% under this scenario.
④ Non farm growth between 50000 and 150000 (probability 25%): As the market quickly adapts to higher recession risks, the direct market response is expected to be negative. Given the risk position on Tuesday, the market's response to this non farm event may be more calm than before. The market will quickly form an expected synergy around a 50 basis point interest rate cut, with the biggest downside risk being the market's acceptance of claims of economic recession/growth panic. Overall, the S&P 500 index is expected to decline by 0.50% -1.00% under this scenario.
⑤ Non farm growth is below 50000 (probability 5%). This is another tail risk scenario, as non farm payroll has not fallen below 100000 since December 2020. This will immediately trigger a new round of concerns about economic growth, and we may begin to fully anticipate a 50 basis point rate cut in September, with the possibility of introducing an expectation of a 75 basis point rate cut. In this situation, as with past interest rate cut cycles, the market may assume that the United States has fallen into recession, so buying the first rate cut is not cost-effective. Overall, the S&P 500 index is expected to decline by 1.25% -2.00% under this scenario.
Similar to JPMorgan Chase, Goldman Sachs' stock trading department has also made different scenario estimates for the impact of non farm activities. The prediction of this line is as follows:
Non farm>; 250000: The S&P 500 index rose by 0.5% -1%;
Non farm 200000 to 250000: S&P 500 index rises by at least 1%;
Non farm 150000 to 200000: S&P 500 index rises by 0.25% -0.5%;
Non farm 100000 to 150000: The S&P 500 index fell by 0-0.5%;
Non farm; 100000: The S&P 500 index has fallen by at least 1%.
The treasury bond trading department of Goldman Sachs also reminded investors to pay attention to the unemployment rate, and believed that this would have the following impact on the rate cut of the Federal Reserve in September:
The unemployment rate is 4.19% or lower=as long as the number of employed people is positive, there will be a 25 basis point interest rate cut in September;
The unemployment rate is between 4.20-4.29%. If the number of employed people exceeds 150000, there will be a 25 basis point interest rate cut in September; If the number of employed people is less than 150000, the interest rate will be reduced by 50 basis points;
The unemployment rate will be cut by 50 basis points in September if it is 4.30% or higher.