The tariff effect remains unclear, tonight's non-farm payrolls must be "bad enough but not collapsing"!

The U.S. non-farm payroll data for July will be released tonight. This is not only a check-up to assess the temperature of the labor market but also a key clue to determine whether the Federal Reserve will begin to cut interest rates in September. In the current context where the transmission of tariffs to inflation is still unclear, a "sufficiently weak but not terrible" employment data may be the result the market most wants to see.

The U.S. Bureau of Labor Statistics will release the July non-farm payroll report at 8:30 AM on Friday. The market generally expects that the non-farm payrolls in July will increase by 104,000, down from 147,000 in June, below the three-month average of 150,000 and the twelve-month average of 151,000.

The unemployment rate is expected to rise to 4.2% (previous value 4.1%), which is a slight deterioration but still below the Federal Reserve's median forecast of 4.5% by the end of the year. Average hourly earnings are expected to grow by 0.3% month-on-month, and the average workweek is expected to remain stable at 34.2 hours.

Federal Reserve Chairman Jerome Powell previously stated that the unemployment rate is a key indicator for observing the labor market. Currently, most Federal Reserve officials believe that the labor market is close to or at full employment. Richmond Fed President Barkin suggested that the breakeven point for the current job market is about 80,000 to 100,000 jobs per month.

Goldman Sachs believes that if the number of new jobs falls within the range of 75,000 to 124,000, the S&P 500 index will react positively, while JPMorgan is more optimistic, predicting that the market will respond positively to any data above 100,000 .

Mixed Signals from Leading Indicators, but Downward Trend is Consensus

From various leading indicators, the signals of a cooling job market are becoming increasingly clear:

The number of initial jobless claims fell to 221,000 during the survey week for the employment report, a significant decrease from the previous month's reference period of 246,000. The number of continuing claims for unemployment benefits dropped from 1.964 million to 1.946 million. The decline in continuing claims may indicate that previously unemployed individuals who had difficulty re-entering the job market have found work.

The S&P Global Flash PMI report shows that employment has increased for the fifth consecutive month, as companies hire more employees due to increased backlogs. However, the ADP National Employment Report and the June JOLTS job openings report both showed weakness. The number of layoffs reported by Challenger increased by 62,000 in July, up from 48,000 in June.

The labor market differential from the Conference Board (the percentage of respondents who believe jobs are plentiful minus the percentage who believe jobs are hard to find) fell again in July to a new cycle low of 11.3 percentage points, far below the 33.2 percentage points average level in 2019.

Seasonal "Drag" from Government Sector, Focus Returns to Private Sector

Bank of America expects 60,000 new jobs in July, below the market consensus, mainly dragged down by a decline in government sector employment. The institution expects government employment to decrease by 25,000, primarily a correction from the surge in state and local education services employment in June. In June, employment in this sector grew by 64,000, far exceeding the previous five-month average increase of 13,000 Morgan Stanley expects an increase of 100,000 jobs, with 100,000 jobs added in the private sector and government employment remaining flat. Morgan Stanley predicts that government employment in July may remain basically unchanged, with the federal government expected to reduce about 20,000 jobs due to layoff plans, offset by hiring at the state and local levels.

Therefore, the real focus of this non-farm report is the increase in private sector employment, which MS expects to be +100k. Considering the continued decline in initial jobless claims and the fact that immigration policies have not yet been fully implemented, some industries (such as healthcare, education, and leisure services) may still maintain positive growth.

Analysts point out that tariff policies may have a negative impact on manufacturing employment in the coming months. Manufacturing employment averaged a decrease of 5,000 jobs per month in the second quarter, with an average monthly decrease of 9,000 jobs expected for the entire year of 2024.

Tightening immigration policies are expected to impact industries that rely on immigrant labor. Employment growth in industries most sensitive to changes in immigration policy has dropped from an average of 27,000 jobs per month in 2024 to 7,000 jobs based on a three-month average as of May.

Bank of America believes that it may still be too early in July to see substantial impacts from immigration restrictions, considering implementation and legislative delays. However, the institution expects that immigration restrictions will ultimately have a negative impact on industries such as leisure and hospitality.

Can a "Weak Enough" Non-Farm Report Stabilize Rate Cut Expectations?

The Federal Reserve hopes to see a "return to balance in the labor market," rather than a cliff-like deterioration. The market feels the same: if the data is too strong, rate cut expectations will have to be retracted; if it is too weak, recession fears will rise again.

Goldman Sachs trader Cullen Morgan provided a more conservative market reaction matrix:

• Above 150,000: S&P 500 index up or down 0.25%;
• Between 125,000 and 150,000: S&P 500 index up or down 0.25%;
• Between 100,000 and 124,000: S&P 500 index up 0.4%;
• Between 75,000 and 99,000: S&P 500 index up 0.25%;
• Between 50,000 and 74,000: S&P 500 index down 0.5%;
• Below 50,000: S&P 500 index down 0.75%.

In contrast, the market intelligence team at JPMorgan provided a more optimistic reaction matrix:

• Above 140,000 (5% probability): S&P 500 index up 1%-1.5%;
• Between 120,000 and 140,000 (25% probability): S&P 500 index up 1.25%;
• Between 100,000 and 120,000 (40% probability): S&P 500 index up 25-75 basis points;
• Between 80,000 and 100,000 (25% probability): S&P 500 index down 1%;
• Below 80,000 (5% probability): S&P 500 index down 1.5%-2.5%.

Vickie Chang from Goldman Sachs Global Macro Research pointed out that the market is currently pricing in about 2% growth for the next year, higher than its recent forecast of 1.4% Although the growth pricing is not overly optimistic relative to the medium-term outlook, the current pricing is more relaxed, making the market more susceptible to the impact of weak data on the narrative of a slowdown in catalysts.

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