September Non-Farm Payrolls Preview: Expected growth in employment numbers, stable unemployment rate, will the US cut interest rates by another 50 basis points?

As the Middle East conflict escalates, the port strike has just ended, and the Fed promises a rate cut, market concerns about tonight's non-farm payroll data have significantly increased.

Let's first take a look at a series of mixed employment data disclosed in the United States this month. The weekly initial jobless claims data shows a decrease in the number of initial claims, while continued claims have risen. Challenger job cuts have slightly decreased, but the "small non-farm" ADP private sector employment numbers rebounded more than expected. The ISM manufacturing employment sub-index further declined, entering contraction territory for the first time since June. The lagging August JOLTS job openings unexpectedly hit a three-month high.

Analysts believe that the upcoming employment data will help solidify market expectations of a Fed rate cut before the end of this year. Fed Chairman Powell stated this week, "If the economy evolves as we anticipate, the Fed will cut rates by 25 basis points in November and December, respectively." This appears more hawkish compared to current market expectations.

It is worth noting that if the data shows clear signs of weakness, market expectations for another 50 basis point rate cut by the Fed may reignite.

Goldman Sachs: September Non-Farm Payrolls Exceed Market Expectations, Unemployment Rate May Face Pressure

Goldman Sachs Delta One trader Rich Privorotsky stated yesterday that tomorrow's non-farm payroll data is obviously important but may actually take a back seat over the weekend. Employment data should be straightforward - good news is good news, bad news is bad news.

Currently, Wall Street generally expects the U.S. to add 150,000 non-farm jobs in September, a slight increase from the 142,000 in August. While analysts' forecasts vary, ranging from 70,000 to 220,000, the likelihood of extreme data is low. Private sector employment is expected to increase from 118,000 to 125,000.

The unemployment rate is expected to remain unchanged at 4.2%, below the Fed's year-end median forecast of 4.4%.

Goldman Sachs analysts predict that non-farm payrolls in September will increase by 165,000, exceeding market expectations, with private sector employment increasing by 145,000, also surpassing the market's expectation of 125,000. Goldman Sachs believes:

"Big data indicators generally show steady job growth, and seasonal factors may have affected employment data in the past two months."

Goldman Sachs also points out, "If employment is below 100,000, concerns about the Fed falling behind the curve may arise (interest rates may perform better, but the soft landing that the stock market is already pricing in may be challenged). The best scenario is slightly better than expected (but not too strong, i.e., below 200,000)."

Regarding the unemployment rate, Goldman Sachs states that two factors will put pressure on the September unemployment rate:

First, the return of young workers to school may affect the unemployment rate. Since the cyclical low, 45% of the increase in the unemployment rate has come from workers aged 16-24, and the lack of labor market opportunities may prompt them to exit the labor market at a rate higher than the usual seasonal levelsNext, the number of temporary layoffs, which surged in July, decreased in August, possibly partly reflecting the reopening of car factories after summer reorganization shutdowns. However, the number is still about 60,000 higher than in June, indicating further room for a decrease in temporary layoffs this month.

The Federal Open Market Committee (FOMC) recently released economic forecasts showing that by the end of this year, the unemployment rate will rise to 4.4%.

Analyst Expectations Diverge

Analysts have mixed views on the report results. On one hand, analysts who believe the report is better than expected argue that due to the upward revision of August employment growth and the slowdown in layoff rates, a series of other employment growth metrics indicate steady employment growth in September. The median of the indicators they track shows an increase of 169,000 jobs.

On the other hand, analysts who believe the report is weaker than expected point out that JOLTS job vacancies have been trending downward for the past few months. Additionally, the Labor Market Diffusion Index from the Economic Advisory Council shows that the ratio between respondents who believe jobs are plentiful and those who find jobs difficult decreased by 3.3% to 12.6% in September, significantly lower than the average of 30.4% in the first quarter and the average of 33.2% in 2019.

Furthermore, as employment levels in healthcare and government sectors approach pre-pandemic trends, the wage boost from hiring has sharply slowed down in recent months. Analysts believe that this boost may continue to fade and will largely dissipate by the end of the year, further impacting wage growth.

Data Being Too Hot or Too Cold Can "Scare the Market"

At the September FOMC meeting, the Federal Reserve adjusted its language, acknowledging that the risks to the outlook are "roughly balanced" (previously the Fed had stated "moderate progress has been made on the 2% inflation target"), while also noting that employment growth has "slowed" (previously described as "weakened"). It also added that the committee is firmly committed to supporting full employment.

Some analysts pointed out:

"It is clear that the recent weakness in the labor market has raised concerns at the Fed, and the 50 basis point rate cut in September was to ensure policymakers do not 'fall behind the curve' and act before the labor market deteriorates."

The Fed's Bostic stated, "If job growth slows to well below 100,000 jobs, we need to seriously question what is happening. If the data is below 100,000, it could reignite bets on a 50 basis point rate cut."

Goldman Sachs trader Flood warned, "The stock market hopes tomorrow's data roughly meets expectations. Being too hot or too cold will accelerate weekend risk aversion behavior (clearly, being too cold is much worse)."