The last non-farm payroll before the September decision, will it be a 25 or 50 basis point rate cut? We'll have to wait until next week to find out!

Next week, the market will welcome the August non-farm payroll data, which will be the last major employment data before the September Fed decision, and may be a key factor in deciding whether to cut interest rates by 25 or 50 basis points.

With inflation slowing down, Fed Chairman Powell has signaled a rate cut in September and stated that officials are "not seeking nor welcoming" further cooling of the labor market. July non-farm payroll growth was below expectations, and the unemployment rate hit its highest level in nearly three years.

On Friday next week, the U.S. Department of Labor will release the August non-farm payroll data. The market generally expects an increase of 165,000 jobs, a significant rebound from the previous month's 114,000. The average job growth over the past three months is expected to slow to slightly above 150,000, the smallest increase since early 2021, while the unemployment rate may slightly decrease from 4.3% to 4.2%.

Citi is more pessimistic than the general expectation, projecting an increase of 125,000 jobs in August, with the unemployment rate remaining at 4.3%, similar to July. This would confirm that the relatively weak data in July was not just due to temporary factors, but rather reflects a true weakening of labor demand, potentially leading the Fed to cut rates by 50 basis points in September.

Regarding the optimistic expectations for August, Bloomberg economist Anna Wong believes:

Non-farm payrolls may improve from the disappointing data in July, but the U.S. Bureau of Labor Statistics revised down early estimates for the March 2024 benchmark period by 818,000, which may make Fed officials less willing to believe the initial values.

Citi expects August non-farm payroll to remain weak, potentially leading to a 50 basis point rate cut by the Fed in September

Citi expects an addition of 125,000 jobs, almost as weak as July:

We see downside risks in employment in the construction, government, manufacturing, and leisure/hospitality sectors. Residential construction volume has been declining throughout the year, contrary to the trend of rising employment in the construction industry. We believe this divergence will not last long. In recent months, non-residential construction spending has also stalled, and the direct spending stimulus from fiscal policy measures in recent years has peaked. We expect this to result in even weaker government employment in the coming months.

We also expect a significant decrease of 15,000 jobs in the manufacturing sector, partly reflecting the typical decline in automotive manufacturing wage positions during the summer holiday period in July, which may not fully rebound in August. With weakening demand for automobiles, production levels may decrease.

Finally, spending on more discretionary services (such as restaurants) has been suppressed for most of the year, potentially leading to further weakness in employment in the leisure/hospitality sector.

Furthermore, regarding the unemployment rate, Citi believes that the unemployment rate may lead the Fed to a more dovish stance:

If the unemployment rate rises again to 4.4% or higher, even with strong job growth, we believe a 50 basis point rate cut by the Fed is almost a certainty, especially given the recent significant downward revisions to job additions.

Since March, the unemployment rate has been steadily increasing each month, a pattern that typically occurs before an economic recession. We expect the unemployment rate to remain unchanged at 4.3% in August, although a drop to 4.2% is not hard to see, but with the labor market weakening more rapidly, the further rise in the unemployment rate remains an underestimated risk

Even if the unemployment rate has slightly decreased, one month of data may not be enough to convince Federal Reserve officials. However, if the unemployment rate falls to 4.2% or 4.1%, new job creation may become more important. If job growth in August is less than 125,000, then it is more likely that a larger rate cut will be implemented.

In addition, Citigroup emphasizes that since the employment data for August will be released on the day before the Federal Reserve's September FOMC meeting blackout period, the data for August will largely determine whether there will be a 50 basis point cut or a 25 basis point cut.