At 20:30 Beijing time on Friday, the United States will release the August non-farm employment report. It is now less than two weeks away from the highly anticipated "first cut" by the Federal Reserve. Wall Street and traders are closely watching whether the performance of the labor market supports a significant rate cut by the Federal Reserve.

Previously, the unexpected increase in the US unemployment rate to 4.3% in July triggered the Sam rule symbolizing economic recession. The addition of non-farm employment was also lower than expected, leading to a global stock market crash on August 5th, known as "Black Monday". At the time, the market believed that the Federal Reserve needed to cut interest rates urgently to stabilize the market. In addition, after Federal Reserve Chairman Powell claimed that it was time to start cutting interest rates, there was a heated discussion about whether the rate cut in September would be 25 or 50 basis points. Therefore, this non-farm employment report is particularly important to the market. Regardless of whether the data performs below or above expectations, various asset prices are likely to experience significant volatility.

Brett Kenwell, a US investment analyst at eToro, said: "The previous employment report was quite disappointing. It does indicate that there are some concerns in the labor market, and the labor market is the lifeblood of the US economy...So I think investors may be more nervous than before before the release of this data."

In terms of market expectations, it is expected that the US will record an increase of 0.16 million in non-farm employment in August, a significant rebound from the previous value of 0.114 million. The reason may be that August is no longer affected by hurricanes and there is a surge in the number of immigrants. The unemployment rate is expected to slightly decline from 4.3% to 4.2%, partly due to the reversal of temporary layoffs in July. In terms of wages, it is expected that the monthly and annual rates of average hourly wages will record 0.3% and 3.7% respectively, both slightly higher than the previous values, possibly due to base effects.

Julia Pollak, Chief Economist at ZipRecruiter, said: "Our data shows that July was very weak, but there was some improvement in August." She added that the number of new non-farm jobs is expected to be around 0.15 million. The wage growth rate is also declining, according to data from Paychex, a provider of human resource services. The company found that the "average hourly wage growth rate (2.89%) fell below 3% for the first time since January 2021", and the growth rate further declined to 1.91% in August. Similarly, Homebase, a small business HR tech company, said that a survey of 0.1 million companies showed that working hours in August decreased by 3.5% compared to July, and the number of employees also decreased by a similar percentage.

During a speech at the annual economic symposium in Jackson Hole, Wyoming, Powell said that hiring has"significantly cooled" and that the Federal Reserve is not"seeking or welcoming further cooling" of the job market. Economists believe that if the Federal Reserve believes it needs to offset the impact of the slowdown in employment, it may accelerate interest rate cuts. In the latest Beige Book, the Federal Reserve described the employment level as "generally unchanged or slightly higher in recent weeks". This may indicate that the Fed believes that the labor market may not continue to deteriorate, even if people are increasingly concerned that high interest rates may excessively suppress labor demand.

According to the Job Openings and Labor Turnover Survey (JOLTS) released by the US Bureau of Labor Statistics on Wednesday, the number of job openings in the US decreased to 7.67 million in July, the lowest level since early 2021, and layoffs increased, consistent with other signs of a slowdown in worker demand. After the data was released, short-term interest rate futures showed that the possibility of a 50-basis-point interest rate cut in September by the Federal Reserve was once higher than a 25-basis-point cut.

The number of vacant positions and the proportion of unemployed individuals have fallen to the pre-epidemic level.

Citibank pointed out that the employment data in August will be a key factor in determining whether Federal Reserve officials will choose to start a rate cut cycle in September with a 50 basis point cut or a 25 basis point cut. As the August employment data will be released on the eve of the quiet period before the Fed's September meeting, whether it will be a 50 basis point cut or a 25 basis point cut will largely depend on this data.

The bank expects the August report to be similar to July, with an additional 1.25 million jobs and an unemployment rate remaining at 4.3%, both of which are more pessimistic than the market consensus. Citibank believes that this will indicate that the weaker data in July was not caused by temporary factors, but rather reflects a genuinely soft labor demand, which is expected to prompt the Federal Reserve to cut rates by 50 basis points in September.

The bank also pointed out that even if the unemployment rate falls slightly, after several months of increase, the data for just one month may not be enough to convince Federal Reserve officials that the unemployment rate will not continue to rise. However, if the unemployment rate falls to 4.2% or even 4.1%, the performance of the non-farm employment population data will be more important. Citibank believes that if the additional non-farm numbers in August are less than 0.125 million, even if the unemployment rate falls, a substantial rate cut may still be the more viable choice.

However, Lydia Boussour, Senior Economist at EY-Parthenon, said, "The August employment report is expected to keep the Fed's momentum for a 25 basis point cut at the September policy meeting." She added, "Employment growth for the year is expected to remain below trend, with employers expected to add an average of 0.1 million jobs per month for the remainder of the year, and the unemployment rate is expected to rise moderately to 4.5% by the end of the year."

While slowing employment growth is expected, there is growing concern that the labor market is not just slowing down under the Fed's pressure to control inflation and raise interest rates, but is actually gradually heading towards collapse.

Stephen Dover, Director and Chief Market Strategist at Franklin Templeton Research Institute, believes that investors may be more concerned about whether the rise in the unemployment rate is due to actual job losses or because of an increase in labor force participation. The number of weekly initial jobless claims (an increase indicates more workers being laid off), whether temporary layoffs are turning into permanent layoffs, and the overall increase or decrease in non-farm employment each month will be critical data in determining the true performance of employment.

Editor/Rocky