Caixin News, November 1st (Editor: Xiaoxiang) Four days later, the United States will welcome the presidential election, six days later will welcome the November decision of the Federal Reserve, tonight the US Department of Labor will release the US non-farm employment data for October, undoubtedly expected to attract the attention of all market participants.

And this highly anticipated non-farm report, its unpredictability seems destined to be the biggest since the beginning of this year - this report will bear the imprint of hurricanes, the two hurricanes "Helene" and "Milton" since late September, are likely to cause severe disturbances to economic indicators at a particularly delicate moment; At the same time, in the final stages of the presidential election, this non-farm report is also likely to be suspected by the outside world of being used for political manipulation.

Even a series of leading employment indicators released before non-farm, it is difficult to tell people clearly whether tonight's non-farm data will be good or bad - the disastrous JOLTS job vacancy report, and the unexpectedly well above expected ADP employment data seem to provide reasons for both bulls and bears.

No wonder some industry insiders still believe that non-farm may experience a surge in growth beyond expectations, while others have already begun to prepare for the impact of negative data, and even worry that in the most extreme cases non-farm may be negative...

Could tonight's non-farm be negative in extreme circumstances?

Let's first take a look at the market's expectations for tonight's non-farm. Due to the significant differences in forecasts for tonight's non-farm among different investment institutions, there are also significant differences in the median estimates of non-farm surveys conducted by different media.

As investors, we may see different estimates of non-farm from different sources. For example, the median estimate in the Reuters survey sample is currently about 0.113 million people, while the median estimate in the Bloomberg survey is only 0.101 million people...

Taking Bloomberg's survey as an example, among the institutions it tracks, Mizuho and Paragon currently have the highest forecast values for October's non-farm data - both at 0.18 million people. On the other hand, Bloomberg Economics itself predicts a shocking -0.01 million people for tonight's data (yes, negative growth). Among the major banks, those closest to the market consensus are Goldman Sachs (expected to be 0.09 million people) and JPMorgan (expected to be 0.1 million people).

As introduced in an article by Caixin this morning, the impact of hurricanes and strike events makes it almost inevitable for October's non-farm data to show certain distortions. However, the extent of distortion and whether it will be so severe as to reduce non-farm payrolls to just tens of thousands or even negative values will only be revealed after tonight's 20:30 data is officially released.

Federal Reserve Board Governor Christopher Waller stated in a mid-October speech that he expects hurricanes and Boeing's strike to reduce new job positions by over 0.1 million. Goldman Sachs economists estimate, based on initial unemployment claims data, loss estimates, and past hurricane landfall situations, that hurricanes alone will reduce new job positions by 0.04 million to 0.05 million. JPMorgan's estimated reduction is around 0.05 million, Barclays estimates a decrease of 0.05 million to 0.06 million.

These impacts can actually be somewhat confirmed from the initial claims data of the past few weeks. In early October, initial claims for unemployment benefits in Florida, Georgia, South Carolina, North Carolina, and Tennessee all rose due to Hurricane "Heleni," and after Hurricane "Milton," initial claims for unemployment benefits in Florida also increased.

In fact, former Federal Reserve Board Governor and current White House National Economic Council Director Brenard had already taken preventive measures for the market before the non-farm release. She explicitly warned that due to disruptive strikes and hurricane impacts, the White House expects a decline in October's U.S. non-farm payroll numbers to be announced this Friday.

As for whether non-farm will suddenly fall to a staggering negative value. At present, it can only be said that there is such an extreme possibility...

Claudia Sahm, the famous proponent of the "Sahm Rule" and former Federal Reserve economist, stated on Tuesday that assuming the basic pace of U.S. employment growth has returned to the average level of 183,000 new hires per month before the COVID-19 pandemic in 2017-19. Regardless of hurricanes and Boeing strikes, the 90% confidence interval based on sampling error is roughly +/-0.13 million, i.e., the upper and lower limits of the blue bars in the chart below. In other words, even if wage growth follows the trend level, the estimated high and low values for non-farm could differ significantly.

The number represented by the orange bar on the right side of the chart takes into account the impact of hurricanes "Heleni," "Milton," and Boeing's strike - further reducing new job positions by 0.1 million. In this scenario, the lower limit of the 90% confidence interval can already reach -0.05 million people.

Of course, from a more "rational" perspective, considering the background of the election only a few days away, the sudden appearance of a negative non-farm payrolls report is still a bit "exaggerated"—almost no one would gamble on an economic collapse a few days before the election.

On the other hand, unlike the non-farm employment job growth based on employer surveys, hurricanes may not have a significant impact on the unemployment rate data for October. The unemployment rate is based on another survey of households. Those who claim to have a job but did not work due to severe weather are still counted as employed. Hurricanes will still have some impact on the unemployment rate, but the general impact is not significant. Additionally, striking workers will also be counted as employed. Economists expect that Friday's employment report will show the October unemployment rate stabilizing at 4.1%, unchanged from September.

The varying degrees of impact on non-farm payrolls and unemployment rate may provide rallying points for Republicans and Democrats in the final stages of the election. If the non-farm employment data does indeed perform poorly, Trump and the Republicans are likely to seize on this and deliberately ignore short-term factors such as hurricanes. Democrats, on the other hand, may not mention the decline in non-farm employment and instead focus on the unemployment rate, which is still at a historically relatively low level.

With great uncertainty: How will tonight's non-farm payrolls affect the market?

So, against the backdrop of high uncertainty surrounding the non-farm payrolls, how will the US stock market be affected tonight?

Let's take a look at the forecasts from Wall Street investment banks as usual. JPMorgan has already listed five scenarios for the market performance after tonight's non-farm payrolls:

① Non-farm payrolls greater than 0.2 million

This is the first type of tail risk outcome. At least on a single day basis, this non-farm figure's bullish impact on the economy is greater than its bullish impact on the stock market. This result will indicate a reacceleration of economic growth, with the previous month's addition of 0.254 million non-farm workers not being an outlier. Moreover, this likely means that the real GDP growth in the United States will remain near high levels (the average real GDP growth rate over the past 8 quarters is +2.8%), and is likely to intensify speculation on skipping rate cuts or completely halting rate cuts in the first half of next year. With bond yields rising in this context (or up by 15-20bps), the impact on the stock market will not be as positive—recent spikes in US bond yields often accompany weak stock market performance, although the negative impact usually dissipates over the next 2-3 days.

JPMorgan believes that the probability of this scenario occurring is 5%, in which case the s&p 500 index's weekly change will be between -0.25% and +0.5% on Friday.

② Non-farm payrolls will range between 0.12 million and -0.2 million.

If average wage growth meets expectations, the market will consider this scenario as one of employment growth without accompanying inflation. Although recent hurricanes and strikes have caused some drag, JPMorgan believes the market will digest this data well, without repricing U.S. bond yields. In other words, this data performance is not enough to make the bond market fully believe that the Fed will skip rate cuts in November.

JPMorgan believes that the probability of this scenario occurring is 30%, and the s&p 500 index will rise by 0.5%-0.75%.

③ Non-farm payrolls will range between 0.08 million and -0.12 million.

This will be a data performance in line with market expectations, keeping the labor market on a growth trajectory. It is worth mentioning that Michael Feroli, Chief U.S. Economist at JPMorgan, estimates this month's non-farm payrolls at 0.1 million, assuming that hurricanes and the Boeing workers' strike will reduce non-farm payroll growth by 0.075 million-0.1 million people that month. This data performance will also sustain expectations for U.S. GDP growth above trend and lead the Fed to continue its accommodative stance—cutting rates by 25 basis points each in November and December.

JPMorgan believes that the probability of this scenario occurring is 40%, and the s&p 500 index will range from flat to up 0.5%.

④ Non-farm payrolls will range between 0.02 million and -0.08 million.

This data performance may cause a slight panic in the market about economic growth, while the enhanced rate cut expectations will partially offset this panic. Nevertheless, considering the short-term negative impacts of hurricanes and strikes, the market may overlook the downside risks brought by this data performance.

Goldman Sachs believes that the probability of this scenario is 20%, and the S&P 500 Index will fall by 0.25%-0.5%.

Non-farm lower than 0.02 million

This is the second type of tail risk outcome. Once negative non-farm data appears, it may trigger larger sell-offs than expected, as we typically see negative non-farm employment data before an economic recession. Even considering the impact of hurricanes and strikes, such data would lead to a resurgence of growth panic seen in early August and early September. In these two instances, stronger retail sales data helped positively reset expectations.

Goldman Sachs believes that the probability of this scenario is 5%, and the S&P 500 Index will fall by 0.75%-1.5%.

Similar to JPMorgan, Goldman Sachs also provided its own forecast, details as follows (Goldman Sachs believes that overly good data is not good for the market):

Non-farm > 0.25 million: S&P 500 Index falls at least 1%;

Non-farm between 0.2 million-0.25 million: S&P 500 Index falls by 0.5%-1%.

Non-farm payrolls in the range of 0.125 million-0.2 million: the s&p 500 index fluctuated between -0.5% and +0.5% on Friday.

Non-farm payrolls in the range of 0.075 million-0.125 million: the s&p 500 index rose by 0.5%-1%.

Non-farm payrolls less than 0.075 million: the s&p 500 index held steady to declined by 0.5%.

Editor / jayden