Non-farm payrolls countdown! Will gold and US stocks ride the roller coaster again?

Tonight at 8:30, the United States will release the July non-farm payroll report. The market is concerned that the unemployment rate will trigger a warning signal of economic recession, highlighting that the Fed's rate cut has come too late.

As Powell emphasized this week, with inflation falling sharply, the Fed no longer needs to focus 100% on inflation, but can now pay attention to the risks of both inflation and employment. In other words, the Fed's focus on employment will increase significantly. Powell stated that officials unanimously believe that the timing of the rate cut is getting closer, and if conditions are met, the earliest rate cut will be in September.

Market Expectations: Employment slowing but still robust

Currently, the market expects the US to record an increase of 175,000 seasonally adjusted non-farm payrolls in July, with the unemployment rate expected to remain at 4.1%, the average hourly wage growth rate expected to be 3.7% annually, with a monthly rate of 0.3%, and the labor participation rate expected to remain at 62.6%.

Jonathan Pingle, an economist at Natixis Bank, is slightly pessimistic: "We estimate that non-farm payrolls increased by 165,000 in July, with private employment increasing by 140,000." He said, this estimate reflects the continued slowdown in job growth earlier this year. Pingle added:

"Due to the impact of Hurricane Beryl and significant seasonal adjustments in the education sector employment in July, this month's forecast is subject to unusually high uncertainty."

One of the most obvious signs of the recent slowdown in the US labor market is the steady rise in the unemployment rate from a historic low of 3.4% in April 2023 to 4.1% in June. Last month's increase in the unemployment rate almost triggered the so-called Sahm Rule. This is an indicator of an impending economic recession, suggesting that once the three-month moving average of the unemployment rate is 0.5 percentage points higher than the low point of the past year, it indicates that a recession has begun.

Claudia Sahm, the founder of the Sahm Rule, stated that the recent rise in the unemployment rate may be driven by labor force expansion caused by immigrants, but there are also "conventional" factors of unemployment that cannot be ignored. Beth Ann Bovino, Chief Economist at Bank of America, believes that she expects the unemployment rate to continue to rise, but "the magnitude will not be significant."

Meanwhile, monthly job growth remains robust but has declined from an average of 250,000 new jobs per month last year. Recent growth has been mainly concentrated in two industries: healthcare and government. Temporary employment has been steadily declining since early 2022, with a decrease of 49,000 positions in June, marking the largest monthly decline in the past two years. Dante DeAntonio, Senior Director at Moody's Analytics, stated that **if the labor market continues to cool, job growth in the US by the end of the year may be only 100,000 jobs per month The number of unfilled job positions has been decreasing, leading to a lower ratio of vacant positions to job seekers. This trend indicates that the labor market is more balanced than a year ago, with the ratio of vacant positions to unemployed workers now at 1.1.

The wage growth closely related to service sector inflation has also slowed down. The latest Employment Cost Index released earlier this week showed that the annual labor cost growth for U.S. employers slowed to 4.1% in the second quarter, far below the peak of nearly 5.1% in 2022. The "mini non-farm" ADP employment report on Wednesday also confirmed the slowdown in wage growth, with workers who stayed in their jobs in July seeing a year-on-year wage increase of 4.8%, the smallest increase in three years following a 4.9% increase in June.

Will Non-Farm Payrolls Signal an Economic Recession in the U.S.?

Several economic indicators this week have heightened concerns in the market about a potential economic recession in the U.S. The initial jobless claims for the week ending July 27 exceeded expectations, and the July ISM Manufacturing PMI was at 46.8, marking the largest contraction in eight months. If the unemployment rate continues to rise to 4.2% tonight, it could trigger the economic recession warning signal of the Sahm Rule. This indicator has had a 100% accuracy rate since 1970. While the market is worried about this, the founder of this indicator, former Federal Reserve economist Claudia Sahm, warns investors not to prematurely predict an impending recession in the U.S.

In an article published last week, she acknowledged that the risk of an economic recession would certainly increase with weak labor demand. However, she believes that this is largely due to the lagged effects of an overheated economy, with the labor outflow known as the "Great Resignation" leading to a shortage of talent in companies.

Although an increase in the number of actively job-seeking individuals unable to find work is a necessary precondition for economic contraction in the U.S., Sahm points out that other indicators are not consistent with generally weak economic activity, including consumer spending and another key labor market data: non-farm payroll employment.

She wrote last Friday: "Even though the Sahm Rule is about to be triggered, an economic recession is not imminent." Even if the Sahm Rule is flashing red, Sahm believes it may be due to special factors, such as an increase in the number of immigrants adding extra supply to the U.S. labor market, artificially inflating the official unemployment rate.

She believes that this distortion effect on the data is significant enough to lead to incorrect conclusions. Sahm wrote: "The Sahm Rule likely exaggerates the weakness in the labor market due to abnormal changes in labor supply caused by the COVID-19 pandemic and immigration." Furthermore, revisions to past data by officials often result in downward adjustments to the initial readings afterwards

The Fed Shifts Focus to Employment

This week, the Federal Reserve officially began paving the way for a rate cut in September. There was a key change in the wording of the July policy statement, noting that inflation was only "moderately" high, while mentioning that "employment growth has slowed." At the post-meeting press conference, Fed Chair Powell provided more clues about the rate cut in September.

"The Fed kept monetary policy unchanged but provided enough information to keep the market believing in the rate cut expectations for the September FOMC meeting," wrote James Knightley, Chief International Economist at ING. Elyse Ausenbaugh, Head of Investment Strategy at Morgan Stanley Wealth Management, believes that "the market has digested the slightly more hawkish statement than expected quite well." She also pointed out, "If tonight's employment report falls short of expectations, the situation may change." She said:

"This could raise concerns about the Fed falling behind the curve, even though Powell has tried to signal the Fed's willingness to cut rates in such a scenario."

The U.S. labor market remains robust but no longer overheated. Nevertheless, the Fed still hopes to prevent further economic slowdown, avoid significant unemployment, and even a recession. Powell stated this week that the unemployment rate remains low, the labor market has become more balanced, and there are real downside risks facing the current job market.

Other Fed policymakers have also recently pointed out that the labor supply-demand balance is more balanced than in the past few years. "Considering the number of immigrants, job growth is not excessive, nominal wage growth is close to the level consistent with price stability, the unemployment rate is close to its long-term normal level, and the job vacancy rate is close to the level before the COVID-19 pandemic," Fed Governor Waller said in mid-July. "The involuntary layoff rate has been stable at 1% for over two years." He said:

"In terms of the dual mandate of employment, we are likely to achieve a soft landing."

"For policymakers, the situation is straightforward: overall data points to a weakening labor market momentum, moderate inflation and wage growth," wrote Gregory Daco, Chief Economist at EY. He stated that the latest trends, including easing inflation, indicate that now is the time for the Fed to "realign policy to fit the current economic conditions and future outlook."