ADP Surprises, How Exciting Will Nonfarm Payrolls Be Tonight?

Considering the recent stronger-than-expected initial jobless claims in the United States and the "mini non-farm" ADP report that far exceeded expectations, tonight's release of the highly anticipated non-farm payroll data could be very exciting.

At 20:30 Beijing time on Friday, July 7th, the U.S. Bureau of Labor Statistics will release the June non-farm employment figures, including the unemployment rate, revealing the latest situation in the U.S. labor market.

Economists generally expect that the labor market will continue to loosen, with the number of new jobs added in June expected to decrease from 339,000 in May to 225,000. The average hourly wage growth rate is expected to decline by 0.1 percentage points to 4.2% year-on-year, while the month-on-month growth rate is expected to remain at 0.3%. However, the unemployment rate is expected to decline by 0.1 percentage points to 3.6%.

It is worth noting that since March 2022, the non-farm payroll data has exceeded expectations for 14 consecutive months, and with most leading indicators also surpassing expectations, will Wall Street be "caught off guard" again this time?

The following are the predictions of 25 major Wall Street investment banks for the June non-farm payroll data. The expected values for the unemployment rate and the year-on-year growth rate of hourly wages are not significantly different, with forecast ranges of 3.6%-3.7% and 4.2%-4.3%, respectively. However, there is a large difference in the predictions for the number of new non-farm jobs, with a forecast range of 175,000-275,000.

Leading Indicators: Labor Market Still Tight

Economists predict that the number of new jobs added in June will decrease from 339,000 in May to 225,000. However, based on recent leading indicators such as initial jobless claims, ADP, and layoffs, the U.S. labor market may still be tight.

Initial Jobless Claims: The data on initial jobless claims, which is synchronized with the non-farm payroll survey period, shows that the number of first-time applications for unemployment benefits has surged to 265,000, the highest level since October 2021. The four-week average of initial claims is 256,000, significantly higher than the 231,000 in May.

"Mini Non-Farm" ADP: Data released on Thursday showed that the number of new jobs added in the U.S. in June was 497,000, more than double the market's expectation of 225,000, and far exceeded the previous value of 278,000, marking the largest monthly increase since July 2022.

Challenger Layoffs: Also released on Thursday, the number of job cuts by U.S. challenger companies in June dropped sharply from 80,100 in May to 40,700, the lowest level in seven months. It is currently significantly lower than the peak of 103,000 in January, indicating a loss of momentum in job cuts in the technology industry.

ISM Employment Index: In June, the ISM Manufacturing Employment Index contracted, dropping from 51.4 in May to 48.1. The survey indicated that there are signs that the manufacturing sector will carry out more layoffs in the near future. However, the service labor market continues to heat up, and the employment index in the service industry has risen from 49.2 to 53.1. Some surveyed companies said, "We cannot find qualified candidates for certain vacant positions," and "We can finally fill some positions that have been vacant for a while."

Consumer Survey: The US consumer confidence index in June rose to its highest level in 17 months. The gap between the expectations of "plentiful" and "not so plentiful" job positions has widened, indicating that consumers are more optimistic about the labor market. At the same time, consumers' assessment of the short-term labor market has also improved. The number of consumers expecting an increase in job opportunities has increased, while the number of consumers expecting a decrease in job opportunities has decreased.

However, not all indicators are sending out hot signals.

Job Openings: Revised data released on Thursday showed that job openings in the United States in May decreased from the revised figure of 10.3 million in April to 9.8 million.

Initial Unemployment Claims: Some analysts pointed out that recent data has been distorted due to policy changes and fraudulent claims. After adjustment, the number of initial unemployment claims is still close to the level at the beginning of May. Many laid-off workers have been able to find new jobs relatively quickly, and the decrease in overall labor demand is mainly due to a decrease in job openings rather than a decrease in the employment rate.

Unemployment Rate May Temporarily Decline

Economists expect the unemployment rate to decline by 0.1 percentage point to 3.6% in June.

Analysts point out that due to the reversal of the downward trend in household employment in May, the unemployment rate may decline in June, but it is expected to gradually rise in the second half of the year.

The latest economic forecast released by the Federal Reserve last month shows that officials expect the unemployment rate to rise to 4.1% by the end of this year and to 4.5% next year.

If the unemployment rate declines as expected, traders will focus on the labor force participation rate, which has remained stable in recent months. Over the past three months, this indicator has remained at a high level of 62.6%, indicating that more people are entering the labor market. At the same time, the U6 unemployment rate, which measures underemployment, has been hovering at a low level of 6.6% to 6.7% over the past three months.

Hourly Wages May Decline Steadily, Work Hours May Remain Stable

Economists expect the year-on-year growth rate of average hourly wages to decline by 0.1 percentage point to 4.2% in June, reaching the lowest level since June 2021. The month-on-month growth rate is expected to remain at 0.3%, consistent with the growth rate in May.

Analysts believe that given the recent decline in the JOLT job vacancy rate, there is a possibility of a decline in wages in June.

Another key indicator, average weekly working hours, has been steadily declining since the beginning of 2021 and fell to the lowest level since April 2020 in May - 34.3 hours, which is the bottom of the range of "economic happiness, healthy working hours" of 34.3-34.6 hours, as recognized by Julia Pollak, Chief Economist at ZipRecruiter. Pollak said that the job market may be at a turning point, as the continued decline in working hours indicates a slowdown in the labor market.

Economists expect the average weekly working hours to remain at 34.3 hours in June, unchanged from the previous value.

Major Views

Goldman Sachs expects a 250,000 increase in employment in June, higher than the general expectation. The year-on-year growth rate of average hourly wages decreased by 0.1 percentage points to 4.2%, and the unemployment rate dropped to 3.6%, both in line with the general expectation.

Goldman Sachs stated that the arrival of college graduates during the summer will provide a boost to the labor market in June. Based on historical experience, when the labor market is tight, the number of new jobs in June tends to accelerate, with an increase of 35,000 people higher than the annual average.

Other employment indicators show strong growth in June, with a median increase of 275,000 people in the four indicators tracked by Goldman Sachs. Goldman Sachs pointed out that seasonal factors may distort the ADP report, so economists in the industry attach less importance to this report.

Nomura Securities expects a 255,000 increase in employment in June, with an unemployment rate of 3.7%, both higher than the general expectation. The month-on-month growth rate of average hourly wages is expected to be 0.3%, in line with the general expectation.

Nomura stated that there are signs of cracks in the labor market, but the risk of a recession in the United States is still low. The astonishing increase in the unemployment rate in May was driven by an unstable workforce, which increased the risk of a reversal in June. In the medium term, the unemployment rate will gradually rise.

UBS expects a 175,000 increase in employment in June, much lower than the general expectation. The unemployment rate is expected to be 3.6%, in line with the general expectation.

UBS stated that June is the first month with minor seasonal adjustments to non-farm data. According to their simulation, seasonal adjustments may bring downward pressure, and the increase in employment in the leisure/hotel and retail industries is expected to slow down. Government employment this month may decrease by 10,000.

Non-Farm Payroll Night, U.S. Stocks Destined for Turmoil

The explosive growth in the June ADP data inevitably raises speculation that the non-farm payroll data to be released tonight may also be quite sensational, and what awaits U.S. stocks may be another storm.

The Federal Open Market Committee (FOMC) will hold a monetary policy meeting from July 25th to 26th. This report will be the last non-farm report before the Fed's interest rate meeting in July. Financial blog Zerohdge stated in its article on Friday that unless the final result is significantly lower than the industry's comprehensive forecast, the Federal Reserve will not consider the possibility of pausing rate hikes in July.

Bloomberg economist Stuart Paul wrote on Thursday, "The pace of hiring is slowing down, but it is still too fast for the Federal Reserve." Nomura expects the Federal Reserve to raise rates by 25 basis points at its July policy meeting, with a low probability of pausing rate hikes for two consecutive months.

The latest Federal Reserve dot plot forecast shows that there may be two more rate hikes this year.

In addition, as of the time of writing, the Chicago Mercantile Exchange (CME) Federal Reserve Watch Tool shows that the pricing in the futures market indicates a close to 90% probability of a 25 basis point rate hike by the Federal Reserve in July, and the probability of a 25 basis point rate hike in September has risen to nearly 30%.