August non-farm payrolls tonight, Wall Street awaits the Fed's policy direction with bated breath

Intelligent Finance APP noticed that Wall Street is preparing for the most important economic data on Friday, when the US Department of Labor will release the employment report, which is expected to largely determine the future policy of the Federal Reserve.

According to data from Dow Jones, Wall Street generally expects non-farm payrolls to increase by 161,000 in August, with the unemployment rate expected to slightly decrease to 4.2%.

However, recent data (including significant downward revisions to previous data) indicates a significant slowdown in hiring activity, introducing some downside risks to this forecast.

In turn, the market is certain that the Federal Reserve will begin cutting interest rates in the coming weeks, with the extent of the rate cut depending on Friday's economic report.

Economist Giacomo Santangelo from job site Monster stated: "The cooling of the labor market is happening faster than we were initially told, so there are doubts about Friday's report." "How the Federal Reserve will respond, how they will adjust interest rates, that's why we're having this conversation."

Although job growth has been slowing down for most of 2024, a report in July showed an increase of only 114,000 jobs, which was disappointing for the market. This wasn't even the lowest number this year, but a previous Fed meeting sparked concerns that the Fed was too complacent about economic weakness and might maintain high rates for too long.

Subsequent reports indicated that while the economy remains stable, hiring is slowing down, manufacturing is further contracting, and it's time for the Fed to start cutting rates to avoid potentially fighting inflation too aggressively and dragging the economy into a recession.

The latest bad news came on Thursday, when payroll processing company ADP reported that private sector employment in August increased by only 99,000, the smallest increase since January 2021.

Considering the Fed's Next Steps

"If they are too aggressive for too long without easing monetary policy, it could lead to a massive recession," Santangelo said, "If this really leads to an economic downturn, then everyone will point fingers at the Fed."

Therefore, the market expects the Fed to cut the benchmark interest rate by at least 25 basis points at the next meeting ending on September 18, and possibly even by 50 basis points. Since the emergency rate cut at the beginning of the COVID-19 pandemic, the Fed has not cut rates by 0.5 percentage points.

Futures contracts indicate that traders expect the Fed to continue cutting rates, lowering the federal funds rate by about 2.25 percentage points by 2025. The benchmark overnight repurchase rate is currently set between 5.25% and 5.5%.

Such an aggressive easing stance not only indicates the central bank's efforts to normalize rates from the high levels of 2023, but also reflects the depth of the economic downturn. However, in the shorter term, rate cuts will be more focused on the labor market still affected by the COVID-19 pandemic.

Extensive job data still heavily favors positions related to healthcare, with the most common search terms being "work from home," "part-time," and "remote," reflecting the shift towards a hybrid work environment Santangelo said that although the gap between job vacancies and recruitable employees has narrowed significantly, from a ratio of 2 to 1 a few years ago to around 1.1 to 1, there still exists a huge skills gap in the labor market.

"The jobs being created may not necessarily be suitable for those who have been laid off. We still have a huge skills gap. This is most easily seen in healthcare." "Job seekers value greater flexibility the most. There is also a gap between employers and job seekers."

Concerns of Job Seekers

Conversely, workers are becoming increasingly pessimistic about the current state of the labor market.

Zeta's Economic Index, which tracks various economic indicators using artificial intelligence, shows that despite overall good economic performance, concerns about employment are intensifying.

Zeta's data shows that the index measuring employment market sentiment decreased by 1% in August, a 4.6% decrease from the same period last year. The index's "New Trends Index" fell by 9.9% this month, reflecting people's concerns about employment stability.

"Despite the economy's resilience... concerns in the labor market persist. The decline in employment confidence, coupled with mixed consumer behavior, indicates that the labor market is still cautious." David Steinberg, co-founder and chairman of Zeta Global, which compiles the index, said. "As signs of an 'economic soft landing' emerge, the continued caution regarding employment stability weakens the overall economic optimism."

Zeta's data reflects a recent survey by the World Business Federation, which showed that respondents believe the gap between easy and difficult job searches has significantly narrowed.

The market will also focus on wage data in the employment report on Friday, although this issue has become less important recently with inflation slowing down.

The market generally believes that average hourly wages will increase by 0.3% from the previous month, and by 3.7% from the same period last year, both up by 0.1 percentage points from July