After ADP skyrocketed, can "non-farm payrolls" drop tonight?

Due to the recent intensive speeches by many senior officials of the Federal Reserve, the expectation of a rate cut has been continuously suppressed, and the U.S. stock market did not start the second quarter as expected. The non-farm payroll report in April will be the highlight of the first trading week of the month.

At 20:30 Beijing time this Friday, the U.S. Department of Labor will release the March non-farm payroll report. Currently, economists generally expect a slowdown in the growth of new non-farm payrolls and wages in March, but the unemployment rate is expected to fall again.

The number of new non-farm payrolls is expected to slow significantly from 275,000 last month to 203,000;

The year-on-year growth rate of average hourly wages has slowed for the second consecutive time to 4.1%, with a month-on-month growth rate increasing from 0.1% to 0.3%;

The unemployment rate has dropped from a near two-year high to 3.8%, still hovering near historic lows.

Following the "explosive" January non-farm data, the February non-farm payroll added employment numbers exceeded expectations again, reaching 275,000, but the unemployment rate rose to a two-year high. The healthy recruitment situation indicates a slight cooling in the labor market.

Regarding inflation, the just-released inflation data cooled slightly as expected, with the core PCE price index increasing by 2.8% year-on-year, the lowest since March 2023, but still not reaching the Fed's target of 2%.

Federal Reserve Chairman Powell stated that although the data of the past two months shows that inflation levels are higher than the second half of last year, the overall downward trend remains unchanged. The Fed has time to make interest rate decisions based on future data and once again hinted at not rushing to cut rates.

Thus, inflation is still hovering above the Fed's 2% target, and the labor market has not completely cooled down. This week's non-farm data will be a key indicator to verify the inflation situation.

Currently, major global investment banks have the following specific forecasts for the March non-farm data:

However, after economists made their predictions, the recently released March "small non-farm" ADP employment numbers surged beyond expectations, adding new uncertainty to tonight's non-farm data. The March "small non-farm" saw the largest increase since July last year, with job-hopping salary growth jumping to 10% year-on-year for the second consecutive month, indicating that the labor market is still overheated

Sharp slowdown in non-farm payroll growth

Although major investment banks have varying specific forecasts for non-farm payroll data, the median forecast shows that the number of new non-farm jobs in March will continue to grow strongly, but at a slower pace than the previous month, indicating a cooling labor market.

Nomura Securities' Aichi Amemiya released a research report pointing out that there is not widespread evidence supporting the recent acceleration of new job additions. It is expected that the number of new non-farm jobs in March will slow to 205,000.

The Nomura report indicates that leading indicators are currently mixed, but overall trends are consistent with improvements in the labor market:

The employment sub-index of the S&P Services PMI remains stable in the expansion zone, while the Manufacturing PMI has accelerated growth this year;

The ISM Non-Manufacturing PMI is fluctuating around the boom-bust line, with the Manufacturing PMI shrinking for five consecutive months;

The Labor Market Differential Index (the percentage of people who believe there are plenty of job opportunities minus the percentage of people who believe there are few job opportunities) has risen to a nine-month high of 32.2.

However, some analysts believe that the labor market will continue to be strong.

Thomas Simons' team at Jefferies Bank wrote in their report on Thursday:

"We expect employment data to continue the strong momentum of the past few months."

"The recent revisions have been very large, and the composition of employment is not as encouraging as it was throughout 2023, but we have not seen enough evidence in peripheral labor market data to suggest that employment growth will plummet."

UBS analyst Jonathan Pingle also stated in the latest report that considering unexpected warm weather, seasonal adjustments, and net business birth-death adjustments, non-farm payrolls in March will increase significantly by 240,000.

Wage growth stabilizing or slightly declining

In terms of wage growth, economists generally expect it to stabilize, possibly with a slight slowdown due to seasonal factors.

Both Nomura and UBS expect that the month-on-month growth rate of average hourly earnings in March will stabilize at 0.4%, and the unemployment rate will decline back to 3.8% after reaching a two-year high last month.

However, the Nomura report points out that since the March data will be the first reading in several months not affected by weather-related factors, the month-on-month growth rate of average hourly earnings may increase.

Bank of America also believes that wage growth will slow down, as they have observed that wage growth in March in recent years is often weaker than in February. Therefore, the number of private sector wage employment in March is expected to slow down from 223,000 in February to over 150,000, leading to a decrease in overall new job additions. The year-on-year growth rate of average hourly earnings is expected to be 4.1%, with a month-on-month growth rate of 0.3%, and the unemployment rate is expected to remain at 3.9%

Is the Fed's "rate cut" plan unchanged?

As of the overnight closing of the US stock market, according to the CME FedWatch tool, the trading data of federal funds futures contracts shows that the probability of a rate cut at the June meeting of the Federal Reserve is 58.5%, lower than the approximately 70% last week, and the number of rate cuts expected within the year is estimated to be 3-4 times.

Nomura believes that even if the non-farm data cools in line with expectations, it is unlikely to prompt the Federal Reserve to cut rates early, as the pace of job growth remains above the "sustainable rate," wage growth is only gradually slowing down, and there is still resistance in the "last mile" against inflation. The Federal Reserve will continue to exercise patience in determining the timing of the first rate cut.

UBS also pointed out that although the overall non-farm data exceeded expectations in March, it is "unlikely" to change the Federal Reserve's plan to cut rates at the June interest rate meeting