August Non-Farm Payrolls Could Trigger 50 Basis Point Rate Cut

Investors are closely watching the upcoming U.S. non-farm payrolls report, which is expected to be released this Friday. The report's outcome could directly influence the Federal Reserve's decision on whether to implement a more aggressive 50 basis point interest rate cut in September.

According to the latest analysis, for the possibility of a 50 basis point rate cut to be seriously considered, the market needs to see the August non-farm payrolls (NFP) increase by less than 40,000 jobs, and the unemployment rate needs to rise to 4.4% or higher. If the annual benchmark revision of non-farm payrolls, scheduled to be released on September 9, is significantly downwardly revised, it could confirm that the labor market is weaker than the data suggests, potentially pushing the Federal Reserve to adopt more accommodative policies.

Economists' median forecast for the August non-farm payrolls increase is 75,000 jobs. If the actual data drops to below 40,000 as predicted, it would constitute a significant downside surprise, almost certainly leading to market bets that the Federal Reserve will adopt a more decisive easing policy.

There is a deeper issue at play: some analysts have raised strong doubts about the accuracy of the official data from the Bureau of Labor Statistics, suggesting that it may have consistently overestimated actual job growth. Regardless of the numbers released this week, a debate about the true state of the labor market is brewing, and the upcoming annual benchmark revision could force the Federal Reserve to confront a job market that is weaker than it appears on the surface.

For a 50 basis point rate cut to be triggered, the data needs to be "bad enough." The analysis provides specific quantitative indicators for the market. It suggests that if the August non-farm payrolls increase by less than 40,000 jobs, the market will start to digest the expectation of a 50 basis point rate cut. The analysis indicates that the current equilibrium growth level of the U.S. job market is around 50,000 to 100,000 jobs per month. Therefore, any reading below 40,000 jobs would be seen as a clear signal of a substantial slowdown in the job market.

However, the non-farm data needs to be interpreted in conjunction with the unemployment rate. The market's expectation for the August unemployment rate is 4.3%, but it is believed that reaching this cycle's high point of 4.3% alone is not enough to guarantee a 50 basis point rate cut, unless the new jobs data is extremely weak. If the unemployment rate rises further to 4.4%, the likelihood of a 50 basis point rate cut would increase significantly, unless the new jobs data is exceptionally strong. Conversely, to completely dispel market expectations of a rate cut, the new jobs data would need to reach 130,000 or more, accompanied by an upward revision of the previous value.

Beyond setting specific thresholds, there is a strong disagreement with the current market and policymakers' interpretation of labor data. It is believed that these widely watched indicators are highly misleading and underestimate the weakness of the labor market. One point of contention is the unemployment rate. Over the past 14 months, the official unemployment rate has remained within a narrow range of 4.1% to 4.2% for 13 of those months, showing no clear trend. However, the employment-population ratio has been steadily declining during this period, which is a more likely indicator of the true weakness in the labor market. Although the current data is far from the sharp deterioration seen in 2008-2009 or 2020, the downward trend is already quite evident.

Another more controversial view directly targets the non-farm payrolls data itself. It is believed that the "birth-death model" used by the Bureau of Labor Statistics in data collection significantly distorts the results. This model aims to estimate the net employment change from new and closed businesses, but it is estimated that over the past year, the model may have overestimated employment by about 70,000 jobs per month on average. Based on this criticism of the "birth-death model," it is estimated that the actual monthly increase in jobs from new businesses may not exceed 20,000. This means that the official non-farm data needs to be viewed with a "discount." For example, a seemingly stable non-farm report with a published value of 100,000 jobs may reflect actual job growth of around 30,000. Even if the published number reaches 170,000, the actual growth may be only around 100,000, just touching the threshold to maintain market equilibrium. This persistent systematic overestimation will eventually need to be corrected to reflect reality. The annual benchmark revision of non-farm payrolls, scheduled to be released by the Bureau of Labor Statistics on September 9, could be a key event. If a significant downward revision occurs, it will confirm market suspicions of data overestimation, potentially serving as another catalyst for the Federal Reserve to adopt more aggressive easing policies.