Summary of Key Points
Tonight, at Beijing time, the U.S. non-farm payroll report for July will be released, which is the most closely watched economic event in the market. There is a significant divergence in forecasts for the number of new jobs created (ranging from 40,000 to 157,000, with a consensus of 80,000), mainly due to the "weak July" curse (where July data has failed to meet expectations for the past three years) and mixed leading indicators. The ADP private employment figure increased by only 44,000, far below expectations, but low layoffs and temporary hiring for the World Cup provide some support. The data outcome will directly affect Federal Reserve policy expectations: a strong report would reinforce the notion of higher interest rates lasting longer, putting pressure on interest rate-sensitive assets such as the stock market; a weak report could lead to expectations of interest rate cuts, which would be positive for these assets.
I. Why are the forecasts so varied? Some predict 150,000 jobs, while others estimate only 18,000?
The wide range of forecasts for July's non-farm payroll is primarily due to conflicting signals:
- Negative signals: ADP private sector employment increased by only 44,000 (far from the expected 100,000). Pioneer Group believes that employment data in previous months was inflated by warm weather, temporary hiring for the World Cup, and early government recruitment, suggesting a correction in July, hence their very low forecast of 18,000. Goldman Sachs also expects weaker data from alternative indicators (such as small business hiring) compared to June, predicting 75,000 jobs, slightly below the consensus.
- Data integrity issues: The June employment figures were based on a half-response rate, and the Bureau of Labor Statistics used models to estimate the rest. Barclays suggests that there may be significant revisions, but it's unclear whether they will be upward or downward.
In short, there is no consensus on the actual employment situation, leading to widely differing forecasts.
II. The "Weak July" Curse: Has it happened in the past three years and will it happen again this year?
The "weak July" phenomenon is not a mystery but a consistent pattern:
- In the past three years, July job creation has been 66,000 fewer than the average of the previous three months and 35,000 fewer than market expectations. Moreover, each time July data was released, the figures for the previous two months were revised downward (on average by 112,000).
- Goldman Sachs uses this pattern as a key risk factor, noting that alternative indicators show an average increase of only 65,000 jobs in July, lower than June's 79,000.
The market is most concerned that this year's July data will be worse than expected and further drag down previous figures.
III. Are there any positives in the job market? The World Cup, fewer layoffs, and government recruitment?
Not all indicators are negative; there are three potential supports:
- World Cup hiring: Cities hosting the World Cup (e.g., Miami) saw faster employment growth in July, with Goldman Sachs estimating a contribution of 10,000 jobs (mainly in hospitality, catering, and transportation). However, this effect will fade after the tournament.
- Fewer layoffs: The number of people applying for unemployment benefits dropped to 210,000 in July (from 224,000 in June), and at one point it was as low as 188,000 (the lowest since 1969). Corporate layoffs also decreased to 33,000 (the lowest since last July).
- Government recruitment: Government departments have been laying off employees for a year and a half, but in the past four months, they have created an average of 12,500 new positions per month, and job openings have rebounded.
These factors can provide some support for the job market, though their impact is limited.
IV. Will the unemployment rate rise? The "pitfall" of labor participation rates is becoming apparent
The employment report does not only focus on new jobs; unemployment rates and labor participation rates are also crucial:
- Labor participation rates plummeted: Many people withdrew from the labor market in June, with the participation rate dropping to 61.5% (the lowest since March 2021), especially among the 25-54 age group, the largest decline since the pandemic.
- Unemployment rates are expected to rise: Goldman Sachs predicts an increase in the unemployment rate from 4.2% to 4.3%. Some analysts, like Pioneer Group, expect it to reach 4.6% by year's end. Citi is even more concerned: with low hiring and layoffs, it will be difficult for new entrants to find jobs, potentially pushing the unemployment rate above 4.5% within months, which could trigger interest rate cuts.
V. What will happen when the data is released? The Fed focuses on inflation, while the market fears "good news"
The impact of this data on the Federal Reserve and the market is opposite:
- Fed: Inflation priority: Officials have described employment as stable, meaning they will focus on controlling inflation as long as it does not collapse. Even if hourly wages rise rapidly (e.g., 0.4% month-on-month), the annual rate of 3.6% is not considered a major issue.
- Market: Good news = bad news: If the data is strong (e.g., over 150,000 jobs created), the Fed may be more inclined to maintain high interest rates, causing declines in interest rate-sensitive assets. If the data is weak (e.g., under 60,000 jobs), the market will expect interest rate cuts, leading to asset gains. JPMorgan has provided specific scenarios: a report above 150,000 jobs could cause the S&P 500 to fall by 50-175 points, while a report below 20,000 jobs might lead to a gain of about 50 points.
Currently, market sentiment is relatively restrained, with option implied volatility at only 0.7%, indicating that some uncertainty has been absorbed. However, tonight's data will still cause the market to react.
In summary, tonight's non-farm payroll report is a real "drama": will the curse be broken? Will the positives be enough to counteract the negative trends? Will unemployment rates rise? These factors will determine the direction of the market and the Federal Reserve's actions. For individuals, it's important to understand that good employment prospects mean higher interest rates and potentially lower stock market performance, while poor employment prospects suggest lower interest rates and potentially higher stock market performance.