July replay of the impact? The outcome of this week's non-farm data will reveal the answer

The final non-farm report before the September interest rate decision of the Federal Reserve will be released this Friday. Against the backdrop of an established downward trend in inflation, this employment report is undoubtedly one of the most important data points of the week and even of September. Looking back at the previous employment report, the alarming situation in July is still vivid: the unemployment rate rose to its highest level in nearly three years, triggering a comprehensive recession alert and leading to a week-long global market plunge.

Will the impact of July repeat itself? For the upcoming August non-farm report, investors will closely watch whether the labor market can demonstrate enough resilience to dispel recession fears.

According to the consensus expectations of economists surveyed by Bloomberg, it is expected that in August, the number of new non-farm jobs will reach 163,000, a significant increase from 114,000 in July. The unemployment rate is expected to decrease from 4.3% to 4.2%, the first decline since March, and the year-on-year growth rate of hourly wages is expected to increase from 3.6% to 3.7%.

Ben Ayers, Senior Analyst at Nationwide Life Insurance, wrote in a report last Friday:

Following Powell's Jackson Hole speech, a September rate cut by the Federal Reserve has become a certainty. However, further cooling of inflation may provide room for a significant rate cut at the upcoming monetary policy meeting, especially if the labor market deteriorates more severely than expected.

We still expect more cautious (25 basis points) rate cuts at the remaining three FOMC meetings in 2024, but if the economic conditions weaken more than expected, the door will be open for larger rate cuts.

Sam Coffin, an analyst at Morgan Stanley, pointed out in a report to clients last week that one of the main reasons for the 4.3% unemployment rate in July was the abnormal increase in temporary layoffs. As Texas gradually recovers from the impact of Hurricane Barry, the labor market is not expected to witness a "disaster" similar to July.

Morgan Stanley predicts that the unemployment rate in August will drop to 4.2%, and the number of new non-farm jobs is expected to increase to 185,000. Coffin wrote:

We expect the re-acceleration of new job creation to prompt the Federal Reserve to cut rates by 25 basis points in September.

According to the CME Group's FedWatch tool, the current market expects a 31% probability of a 25 basis point rate cut by the Federal Reserve in September. Nevertheless, traders have already priced in a full percentage point rate cut for the Federal Reserve this year, as there are only three monetary policy meetings left. This implies that the Federal Reserve may implement a significant 50 basis point rate cut at one of these meetings.

In the major Wall Street banks, Citigroup's expectations are relatively pessimistic, 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 solely due to temporary factors, but rather reflected a genuine weakening of labor demand, potentially leading to a 50 basis point rate cut by the Federal Reserve in SeptemberCiti emphasized that since the August employment data will be released on the day before the quiet period of the September FOMC meeting of the Federal Reserve, this data will largely determine whether there will be a rate cut of 50 basis points or 25 basis points