This time, will the non-farm payroll "slap in the face" the small non-farm payroll?

After the press conference following the July interest rate meeting, Federal Reserve Chairman Powell essentially abandoned the "forward guidance" and instead relied entirely on data to provide market expectations. Tonight, the market eagerly awaits the release of one of the "Four Horsemen" - the US non-farm payroll data for July.

At 20:30 Beijing time on Friday, August 4th, the US Bureau of Labor Statistics will release data on US non-farm employment and unemployment rate for July, revealing the latest situation in the US labor market.

According to data compiled by Bloomberg, economists generally expect that the labor market will continue to slow down in line with the trend in June. It is expected that the number of new jobs added in July will decrease from 209,000 in June to 190,000. If this turns out to be true, it will be the lowest reading since the end of 2020.

The market expects that the year-on-year growth rate of average hourly wages will decline by 0.2 percentage points to 4.2%, and the month-on-month growth rate will decline to 0.3%, potentially setting a record low for year-on-year growth rate in the past two years. The unemployment rate will remain at 3.6%. If the results meet expectations, the market's expectation of no further interest rate hikes by the Federal Reserve this year will continue to increase.

However, some analysts point out that the "Four Horsemen" announced before the September meeting, two non-farm payroll reports and two PCE reports, are likely to support the Federal Reserve's decision to raise interest rates by 25 basis points in September. This is because this year's tourism demand and prices have surpassed last year's levels.

The following are the predictions of 25 Wall Street investment banks for the July non-farm payroll data. There is not much difference in the expected values for the unemployment rate and the year-on-year growth rate of hourly wages, with prediction ranges of 3.5%-3.6% and 4.2%-4.3% respectively. However, there is a large difference in the predictions for the number of new non-farm jobs, with a range of 175,000-290,000.

Leading Indicators: Is the Labor Market Cooling Down?

JOLTS Report: On Tuesday, August 1st, the US Department of Labor reported that there were 9.582 million job openings in June, the lowest since April 2021, slightly lower than the expected 9.6 million.

Analysis indicates that the latest JOLTS data shows that although the decrease in job openings in June further confirms the slowdown in demand for workers, it is accompanied by a decrease in layoffs and historically low unemployment rates.

Initial Jobless Claims: In the week ending July 22nd, the number of initial jobless claims was 221,000, the lowest since the week of February 25th, 2023. In the week ending July 29th, the number of initial jobless claims was 227,000, in line with expectations. Although it has slightly increased, it remains at a low level.

ISM Employment Index: In July, the ISM Manufacturing Employment Index continued its contraction trend from June, with an employment index of 44.4, the lowest reading since July 2020. The data indicates a general weakness in the manufacturing sector, forcing factories to reduce their workforce. In stark contrast, the overall labor market remains quite strong.

US Quarterly Employment Cost Index (ECI): Data released by the US Bureau of Labor Statistics shows that the US Quarterly Employment Cost Index rose by 1% in the second quarter, which is lower than the median of 1.1% in economists' surveys. Analysts believe that this data reflects a gradual cooling of the US labor market.

LinkedIn Labor Market Indicator: An indicator constructed by LinkedIn to measure the tightness of the labor market shows that the labor market may not be as tight as indicated by the US Bureau of Labor Statistics (BLS) data.

In June, the number of positions applied for by each applicant on LinkedIn increased significantly by 35% compared to the same period last year, while the number of job postings decreased by 2% compared to May and decreased by 20.9% compared to the same period last year. There are signs of a cooling labor market.

Markit Services PMI: The final value of the US Markit Services PMI in July was 52.3, the lowest since February 2023. The employment sub-index fell to 50.9, the lowest since January 2023.

July Challenger Job Cuts: The number of job cuts by US challenger companies in July was 23,697, the lowest since August 2022. Andy Challenger, Senior Vice President of Challenger, stated that many companies are reluctant to continue large-scale layoffs and have slowed down their hiring pace.

Clearly, many market participants cannot ignore the strong ADP Employment Report released overnight when mentioning tonight's non-farm payroll data. The hotness of the service industry led to a significant increase in ADP employment in July, with employment increasing by 324,000, nearly twice the expected amount. Among them, the service industry added 303,000 jobs.

Therefore, some analysts believe that although the "ADP Employment Report" and the non-farm payroll data "clashed" in June, it may be the non-farm data that was "unusually weak" last month, and the strength of the service industry and the strong ADP report may bring some upward risks to the non-farm data.

Unemployment Rate May Remain Low

According to data released by the Bureau of Labor Statistics, employment in the middle and lower ends of the US job market remains strong. On the one hand, middle and lower-end industries represented by transportation and retail have already felt the pressure of economic slowdown, and their operations and debts are facing challenges.

On the other hand, the extremely low unemployment rate in the US may have some "room for improvement". The tightness of the US labor market is mainly driven by unskilled work, with the employment rate of people with a high school diploma or below reaching its highest level in history, while the employment of people with a bachelor's degree or higher has turned downward, which is consistent with the job cuts data.

Since the end of last year, layoffs in the US have mainly concentrated in high-income groups such as technology and finance, while the retail, transportation, and catering industries, which are in the middle and lower ends of employment, still show a strong demand and supply situation. Despite the fact that the prosperity of the service industry has indeed driven the growth of related employment, the pressure from labor unions behind it cannot be ignored. This may result in many companies encountering resistance in terms of layoffs, and they have to bear the rising labor costs and exacerbate the operational pressure under the threat of strikes.

Hourly wages are steadily declining, and working hours may remain unchanged from the previous value.

Regarding tonight's data, some industry insiders believe that apart from the non-farm main indicators, another key factor may be the performance of wages.

Looking at the wage growth of non-farm employees in the previous small non-farm data, the year-on-year growth rate of wages for July employment personnel slowed down further to 6.2% compared to 6.4% in June, setting the slowest growth rate since November 2021. For job changers, wage growth slowed to 10.2%.

Therefore, economists generally believe that the average hourly wage for non-farm is expected to decline by 0.3% on a month-on-month basis, with a year-on-year growth of 4.2% compared to the same period last year. This will bring the annual growth rate to the lowest level since June 2021, although it is still higher than the level that the Federal Reserve considers to be in line with the 2% inflation target, which also means a step in the right direction.

Wall Street News previously analyzed that under the promotion of labor shortages and the rise of unions in retail, catering, and other service industries, the wage growth of the middle and low-income groups in the United States after the epidemic is faster than that of the high-income groups. The hourly wage of the low-income group (adjusted for inflation) has increased by nearly 6% in the past two years, while the income of the high-income group has been severely eroded by inflation.

The average weekly working hours will also be another key indicator. Since the beginning of 2021, the working hours of US employees have been steadily but moderately declining and have now fallen to the lowest level since April 2020.

Major Views

Barclays stated that they believe the increase in non-farm employment in July will accelerate from 209,000 in June to 250,000, with the private sector contributing the most, increasing to 200,000, far higher than 149,000 in June.

Nomura pointed out in its report that it is expected that non-farm employment in July will reach 220,000, slightly rebounding from June, but different from Barclays' view, Nomura believes that government employment is strong and is likely to continue to maintain strong momentum in July:

The average growth rate of government employment in the first half of this year was 63,000, close to the highest point in decades. Seasonal adjustments are also very favorable for government employment in July, adding additional upward risks to July employment data.

The growth of new jobs in private enterprises has been slowing down and is now approaching pre-pandemic levels. The average monthly increase in employment in the private sector is only 196,000, and we expect it to weaken further this month to 170,000.

Looking at different industries, the situation is mixed. Typical cyclical industries such as construction and manufacturing have shown steady growth in employment, and this trend is expected to continue until July.

According to economists at Fabank, the number of new non-farm jobs in July is expected to accelerate from 209,000 in June to 225,000, which is still below the average level. This is consistent with the gradual but sustained cooling trend in the labor market.

The sluggish demand will limit the growth of employment in the service industry. Overall, these data are in line with the Federal Reserve's patient approach to interest rate setting.

Societe Generale expects the growth of non-farm employment in July to continue to slow down, with an increase of 190,000 jobs. However, any growth above 150,000-175,000 will be considered strong.

Over time, such strong growth has supported further decline in the unemployment rate. Despite the slowdown in job growth, the unemployment rate is expected to drop from 3.6% in June to 3.5% in July. The increase in employment means that the unemployment rate is likely to continue to decline. In addition, the monthly growth rate of average hourly wages will be 0.3%.

How will the market react?

In terms of the US dollar, if non-farm employment exceeds expectations, it may fuel market speculation that the Federal Reserve's rate hike is not yet over, thereby helping to boost the US dollar. If the July non-farm data disappoints, it may cause some damage to the US dollar and push up the euro.