August Non-Farm Payrolls to Influence Fed Rate Cut Expectations

The upcoming release of the August non-farm payrolls data on Friday is anticipated to be a critical moment for investors evaluating the Federal Reserve's potential rate cuts in the coming months. Analysts at Bank of America Merrill Lynch have emphasized that while a stronger-than-expected employment growth could influence market sentiment, it may not significantly alter the current expectations for a September rate cut. This is due to the underlying signals of economic weakness and the dovish stance of the Federal Reserve Chairman.

The key factors that will determine the market's reaction to the non-farm payrolls data are the unemployment rate and any revisions to previous data points. A higher unemployment rate or significant downward revisions to prior months' data could reinforce the narrative of a slowing economy, thereby increasing the likelihood of a rate cut. Conversely, a robust employment report with a lower unemployment rate and upward revisions could complicate the Fed's decision-making process, potentially delaying or reducing the magnitude of the anticipated rate cut.

Investors are closely monitoring these economic indicators as they navigate the current market environment, which is characterized by persistent inflationary pressures and geopolitical uncertainties. The upcoming non-farm payrolls report will provide crucial insights into the labor market's health and its implications for monetary policy. The Federal Reserve's dovish stance, as indicated by recent communications, suggests a willingness to support economic growth through accommodative policies, including potential rate cuts.

The market's focus on the unemployment rate and data revisions underscores the importance of accurate economic data in shaping monetary policy expectations. Analysts and investors alike are bracing for potential volatility as the data is released, with the outcome likely to influence market sentiment and future policy decisions. The Federal Reserve's next move will be closely watched, as it seeks to balance the need for economic stimulus with the risks of overstimulating an already fragile economy.

Bank of America Merrill Lynch anticipates that the August non-farm payrolls report will show a modest increase in employment, with an addition of 90,000 jobs. This projection is higher than the 73,000 jobs added in July and the market consensus of 75,000 jobs. The report notes that while the four-week moving average of initial jobless claims remains at a moderate level, the decline in continuing jobless claims supports a slight acceleration in job growth.

However, the report emphasizes that market attention will be on the revisions to the July non-farm payrolls data. Given that initial values for this year have been consistently downwardly revised, and considering the low response rate for the July survey, there is a possibility of significant downward revisions. This could reveal a more persistent labor market weakness than initially anticipated.

The dovish tone set by the Federal Reserve Chairman at the Jackson Hole symposium has established a baseline that requires exceptionally strong data to prevent a September rate cut. The report suggests that while the official forecast remains "maintain interest rates," the risks have "clearly shifted towards a rate cut."

Historical data revisions have become a crucial factor in assessing the true health of the U.S. labor market. The report highlights that significant downward revisions to the May and June non-farm payrolls data have reduced the average monthly growth to just 33,000 jobs. The initial July figure of 73,000 jobs faces considerable uncertainty, with a survey response rate of only 57.6%, significantly lower than the 68.4% in May and 59.5% in June. Given that every non-farm data point released this year has been revised downward, there is a reasonable concern that the July data may follow the same pattern.

The report warns that if the July data is revised downward, it could indicate that "labor market weakness is more persistent than we anticipated."

Following the dovish signals from the Jackson Hole symposium, the threshold for preventing a September rate cut has been significantly raised. The report clearly states that data is now needed to justify "not cutting rates." According to the analysis, a report that would allow the Federal Reserve to "maintain interest rates" would require an unemployment rate of 4.2% or lower, job growth of at least 70,000, and minimal downward revisions to the July data. The unemployment rate will be a critical variable: if it falls to 4.1%, the requirement for job growth will decrease; if it rises to 4.3%, the requirement will increase significantly.

Ultimately, if the data is in a "gray area," the August inflation data will also be decisive. The report predicts that the August non-farm payrolls report will show mixed results across different sectors. Some areas are expected to show improvement, while others will continue to struggle. In the positive sector, government employment, which decreased by 10,000 in July, is expected to add 5,000 jobs in August. Additionally, employment in the tourism and hotel industries, which grew by an average of 9,000 jobs in June and July, is expected to see a slight increase in August. This optimism is backed by the fact that airport passenger traffic for most of August exceeded the same period in 2024, indicating a recovery in leisure travel.

On the other hand, structural weakness cannot be ignored. The report notes that the professional and business services sector, which has seen job cuts for three consecutive months, may continue to struggle with hiring due to the accelerated use of AI and low labor market mobility. Manufacturing employment is also expected to remain weak due to labor supply shocks and uncertainty over tariffs. In terms of wages, Bank of America Merrill Lynch expects that the average hourly earnings will grow by 0.3% month-over-month, and the average weekly hours worked will remain stable at 34.3 hours.