"Wild Non-Farm Payroll" is coming tonight! It is crucial for whether the Federal Reserve will hit the "pause button" on interest rate cuts

According to the Zhitong Finance APP, due to hurricanes and frequent strikes, recruitment activities in the U.S. labor market have essentially stagnated for nearly a month, causing the non-farm employment data for October to be somewhat "distorted." Therefore, the non-farm employment report for November, to be released on Friday evening Beijing time, may provide a clearer picture of the direction of the U.S. labor market. This report will have significant implications for whether the U.S. stock market, which has been hitting new highs, can continue to rise and whether the Federal Reserve will choose to "pause interest rate cuts" in December. Wall Street financial giant Goldman Sachs stated that the non-farm data has significant implications for pricing trends in financial markets this year, and the non-farm employment report to be released on Friday is certainly a major event that will influence market direction.

The U.S. Bureau of Labor Statistics is about to release the November non-farm employment data, with economists expecting an increase in non-farm employment of between 214,000 and 220,000 in November, a significant increase compared to just 12,000 in October, which was affected by hurricanes. More importantly, this will be the last comprehensive review of the U.S. economic situation before the Federal Reserve's next monetary policy meeting on December 17-18. The non-farm employment growth data for October was the worst since December 2020. According to Goldman Sachs' analysis team, as recent data suggests a soft landing for the U.S. economy, unexpectedly strong non-farm data will provide important support for the Federal Reserve to choose to pause interest rate cuts at the December meeting.

The reason this non-farm employment report is crucial for global investors is that it represents the Federal Reserve's last comprehensive assessment before the December monetary policy meeting. The market generally predicts that the Federal Reserve will choose to cut rates by another 25 basis points, but this prediction may change significantly based on the performance of the non-farm employment data. This year, the interest rate futures market has often seen a 180-degree reversal in expectations for Federal Reserve rate cuts after the release of non-farm data.

As inflation rates have clearly declined, with occasional slight increases, and the somewhat weak labor market has increasingly drawn the attention of financial markets, Federal Reserve policymakers are seeking to readjust monetary policy. The non-farm employment report on Friday will undoubtedly provide the Federal Reserve with a clearer economic picture, which is crucial for deciding whether to continue or pause interest rate cuts in December.

Kathy Jones, Chief Fixed Income Strategist at Schwab Center for Financial Research, stated, "I expect this should be a fairly healthy number, as it should reflect a rebound from the extremely weak data in October, when we faced the (hurricane) Milton and the Boeing strike that led to job losses."

The volatility of non-farm employment data this year has been described as "wild." In fact, many economists expect that after the Bureau of Labor Statistics' surveyors re-examine the October non-farm employment data, the figures for October may be revised upward. In the post-COVID era, revisions to non-farm employment reports can sometimes be very large. However, for market pricing and expectations of Federal Reserve rate cuts, this may make the impact of economic data on pricing and rate cut expectations more chaotic, making subsequent trading operations for investors more challengingThe economist team at Bank of America expects that approximately 240,000 jobs will be added in November, indicating a comprehensive return of 100,000 jobs or even more. Therefore, some economists suggest that to better understand potential trends, financial markets may pay more attention to the three-month moving average increase in employment numbers.

Regarding the unemployment rate, the median forecast from economists shows that the unemployment rate will remain unchanged at 4.1%, but several economists believe that this rate could unexpectedly rise to 4.2%. The Bloomberg Economics economist team wrote on Thursday: "As laid-off workers and new entrants to the labor market struggle to find jobs, the unemployment rate may rise. We believe that the true potential pace of job creation each month is far below the pace required to maintain a stable unemployment rate."

In terms of wage growth related to potential inflation, economists generally expect average hourly wages to rise by 0.3% month-on-month and 3.9% year-on-year, indicating that both figures will slightly decline compared to last month, which is good news for reducing inflation.

This data is important for the Federal Reserve

"I expect job growth to exceed 200,000, and if we achieve a real rebound, the risks may also rise further," Jones said. "But I'm also not sure how much information this employment report can provide us, as the impacts of extreme weather have been unstable. Can it really give us a clear view of the future, or is it just uncertain data that needs to be dealt with?"

In addition to the October non-farm payroll report, the overall employment market has shown a slowing trend since April, with an average of about 128,000 new jobs created each month, while the unemployment rate has risen to 4.1%. Federal Reserve policymakers hope to lower the benchmark short-term borrowing rate to a more neutral level to balance inflation and employment, and have cut rates twice in a row to "recalibrate monetary policy." As inflation shows signs of cooling, non-farm data has become the "most important economic data" globally this year.

Vincent Reinhart, an economist at the New York Fed and a former Federal Reserve official with 24 years of service, stated: "This will definitely spark market controversy, as hurricanes and strike disruptions will affect the data for two months, namely the month when people are not working and the data for the next month when people return to work."

"The Federal Reserve believes that the slowdown in non-farm employment growth in 2024 is fundamentally a trend—where the trend is to create just slightly over 100,000 jobs each month, but this is not concerning," he added. "In fact, this is welcomed because, you know, this trend, which is neither strong nor weak, is sustainable and acceptable for the Federal Reserve's dual mandate."

Indeed, the latest signals indicate that the U.S. job market is stabilizing, not as overly heated as during high inflation periods, but also not continuing to deteriorate.

The weekly number of first-time unemployment claims has remained stable at around 220,000, although the number of people continuing to receive unemployment benefits reached its highest level in about three years at the beginning of November. These figures collectively indicate that companies are not conducting large-scale layoffs, but they are also not re-hiring those who have lost their jobsThe economic report released by the Federal Reserve on Wednesday—its "Beige Book" on the current situation—shows that due to low employee turnover and few companies reporting an increase in headcount, hiring activity is "relatively sluggish." The report states that layoffs are "relatively few," but employers are cautious about future hiring speeds, showing more enthusiasm for entry-level and technical positions.

Lydia Boussour, a senior economist at Ernst & Young, stated: "Increased strike activity, hurricanes, and seasonal employment changes have significantly disrupted non-farm payroll data in recent months, making hiring dynamics more difficult to interpret. After eliminating some recent volatility, the data is expected to show a healthy but slowing trend in the labor market."

For the record-high U.S. stock market, this data could determine the trend in December.

According to data released by the U.S. Bureau of Labor Statistics this week, the number of job vacancies increased in October, but the hiring rate declined, and the number of voluntary resignations increased.

When making its final interest rate decision and outlook on future economic and interest rate paths, the Federal Reserve will have to weigh all these factors, as well as concerns about rising inflation.

Reinhart stated that if the labor market remains stable, it should not put additional pressure on inflation. "Therefore, the strategy is to keep demand at trend levels because if growth and demand remain at trend levels, you should maintain the current state of the labor market, which is roughly in this balanced state," he added.

For the record-high U.S. stock market this year, this non-farm data is crucial, as it relates to whether a "Santa Claus" rally can occur in December and whether the historically high U.S. stock market can continue to rise in December. An analysis team from Goldman Sachs wrote in a report on Tuesday: "We believe the 'non-farm sweet spot' needed for the U.S. stock market is between 150,000 and 200,000, and the market is ready for a significant rebound in non-farm data from the poor performance in October, as the adverse effects of hurricanes and strikes gradually dissipate."

"However, the stock market does not want to see an increase in non-farm payrolls above 275,000, as unexpectedly strong employment data would provide important justification for Federal Reserve policymakers to pause the rate-cutting process at the December meeting and could lead them to adopt a wait-and-see attitude for 2025. Therefore, we have temporarily returned to the setting where 'non-farm employment data cannot be too good or too weak' is favorable for the stock market," the Goldman Sachs analysis team stated. Goldman Sachs also emphasized that non-farm payroll growth cannot be too weak; if it falls below the critical threshold of 100,000, it could lead to a pullback in the S&P 500 index due to rising recession expectations