As the U.S. stock market was closed on Thursday in memory of the late former President Carter, the bond 'sell-off storm' that had played out continuously at the beginning of the new year also calmed down a bit yesterday. However, for Wall Street traders, it is clearly still far from a moment to breathe easy. Because tonight, the most significant set of U.S. economic data of this week and the beginning of the year will be released:

The U.S. Department of Labor will release December non-farm employment data at 21:30 Beijing time tonight. Against the backdrop of the U.S. 10-Year Treasury Notes Yield, which serves as a "Global anchor for asset pricing," approaching five at the beginning of the new year, the impact of tonight's data on the global market will undoubtedly be significant.

Due to the impact of strikes in the Aviation industry and hurricane factors, the fluctuation of U.S. labor market data has actually been quite large over the past few months. Angelo Kourkafas, a senior investment strategist at Edward Jones, stated that after the previous two (relatively distorted) reports, this week's non-farm report may be the first that allows for a relatively clear interpretation of the potential trends in the labor market. For the employment report, the market is looking for an appropriate number—neither too hot nor too cold.

What are the expectations for the non-farm market tonight?

According to the median expected value from a Bloomberg survey of economists, the non-farm employment number for December is expected to increase by 0.165 million (the expected median from other media is 0.16 million), a notable decrease from November's 0.227 million. Of course, the strong performance in November was actually influenced by several distorting factors, such as the return of the labor force affected by hurricanes and strikes, which largely inflated the data for that month.

If the consensus expectation from economists' surveys is accurate, then the non-farm employment growth for December will generally slow compared to the average of the past three months (0.173 million) and the average of the past twelve months (0.19 million), but will rise relative to the average of the past six months (0.143 million).

The estimated range for tonight's non-farm employment by investment bank economists varies from 0.1 million to 0.268 million—if tonight's data exceeds or falls below this range, it will be an extremely unexpected situation for the market.

Shruti Mishra, an economist at Bank of America Securities, wrote in a report to clients, "We believe that job growth in December will be much slower than the 22.7 thousand in November, as the latter included compensation for job reinstatement after the hurricane damage in October, particularly in the manufacturing sector. Investors should also pay attention to revised data, as the response rate for the survey statistics has been low, meaning that data corrections in recent months could be significant."

Some leading indicators of employment released earlier this week showed mixed overall performance. Data from the U.S. Bureau of Labor Statistics released on Tuesday indicated that there were 8.1 million job openings at the end of November, a significant increase from 7.84 million in October, marking the highest level since May 2023.

However, the "Little Non-Farm" ADP report released on Wednesday showed that, after seasonal adjustment, 122,000 jobs were added in December, down from 146,000 in November, and below the economists' consensus expectation of 136,000. This is the smallest increase since August of last year.

Among some of the most well-known investment banks on Wall Street, Goldman Sachs has a notably pessimistic forecast for tonight's non-farm data. The non-farm average growth rate reflected by various labor market indicators tracked by Goldman Sachs may be 136,000. Goldman Sachs itself predicts an increase of only 125,000 jobs in December—far below the median market expectation, with the unemployment rate possibly rising from 4.2% in November to 4.3%.

Goldman pointed out, "Our forecast reflects a rebound in labor force participation and job growth among middle-income households, while the employment outlook is more challenging. We expect employment growth in the non-retail industry to slow—especially in Professional Services and Construction, which will offset the impact of increased hiring in Retail Trade this month."

Conversely, looking bullish for tonight's non-farm data is UBS Group. UBS economists expect that due to seasonal factors and the impact of storms, non-farm employment in December will increase by 180,000, higher than the market consensus expectation of 160,000 and the two-month moving average of 132,000. UBS expects the unemployment rate to remain at 4.2%, with average hourly wages increasing by 0.3% and hours worked staying stable.

Overall, apart from the main indicators of non-farm employment tonight, whether there will be surprises in the unemployment rate and hourly wage performance in the non-farm report is also worth investor attention.

Currently, the industry median estimate shows that the unemployment rate in the USA for December is expected to remain at 4.2%. However, some investment banks, including Goldman Sachs mentioned above, also estimate that the unemployment rate may rise to 4.3%, with Citibank even suggesting it could reach 4.4%. Citibank economist Andrew Hollenhorst wrote, "This should remind the market that the labor market is not yet stable and continues to soften. Risk exposure should be balanced towards weaker data."

Regarding hourly wages, it is expected that the average hourly wage in December will increase by 0.3% month-on-month and by 4% year-on-year, with a slight slowdown from last month's 0.4% growth.

How will the financial markets react?

Given that the current interest rate swap market estimates only a meager 6.9% probability for the Federal Reserve to lower rates in January, it can be basically determined tonight that regardless of the non-farm data performance, it may not significantly impact the Federal Reserve's decision to pause rate cuts this month.

However, considering that the yield on U.S. long-term bonds is now frighteningly close to the 5% mark, the data from the first non-farm report of the year is expected to have a significant impact on market trading psychology. Currently, many market participants may prefer to see slightly weaker non-farm data rather than a "hot and sizzling" non-farm report.

Bank of America economists Shruti Mishra and Aditya Bhave stated in a data outlook on January 6 that, "Pausing rate cuts in January is clearly the Federal Reserve's baseline scenario. We believe that if the labor market does not gradually cool down, then the rate cut cycle may come to an end."

Bank of America strategists also believe that the economic data market has returned to a "good news is bad news" phase, where a strong employment report may actually add pressure to the stock market on Friday.

In fact, despite Goldman Sachs estimating that tonight's non-farm figures will only be around 0.125 million people, John Flood, the strategist responsible for global banking and markets at Goldman Sachs, believes that the non-farm "sweet spot" for the U.S. stock market may lie between an increase of 0.1 million and 0.125 million. As shown in the figure below, Goldman Sachs believes that non-farm data falling within this range could drive the S&P 500 Index to experience the most notable knee-jerk rise tonight, with an increase between 0.5% to 1%.

A survey conducted by 22V Research showed that most investors are paying closer attention to employment data than usual. Currently, only 26% of respondents believe that Friday's data will encourage "risk-taking" (risk-on), 40% believe it will lead to "risk aversion" (risk-off), and 34% believe it will be "mixed/negligible."

JPMorgan this week, as usual, made five scenario estimates before the non-farm data (which differ from Goldman Sachs' insights but may also offer reference for investors). Details are as follows:

• Non-farm > 0.22 million

JPMorgan estimates the probability of this scenario occurring at 5%. This tail risk may reignite concerns about inflation, especially if hourly wage data exceeds expectations. Currently, the Federal Reserve believes that the labor market is not a driver of inflation. However, the risk is that hotter non-farm data may push the market back into a dual-risk scenario, repricing the yield curve. If this triggers a sell-off in Bonds, the key level for the 10-Year U.S. Treasury Notes Yield will be 5%—the peak of this cycle; during this cycle, when the 10-Year Treasury yield hits new highs, the stock market often experiences negative reactions over several weeks or months. In this context, JPMorgan expects the S&P 500 Index to drop by 0.5%-1% on Friday.

• Non-farm between 0.18 million-0.22 million

JPMorgan estimates the probability of this scenario occurring at 25%. JPMorgan points out that in the November report from the National Federation of Independent Business (NFIB) in the USA, the net percentage of businesses planning to add jobs soared to its highest level in 12 months; these NFIB data typically lead actual hiring by 3-5 months. If we see tonight's data falling within this range, this could be the first step in the rising turning point in hiring, having a positive impact on GDP and corporate profits. In this context, the S&P 500 Index is expected to rise by 0.25%-0.75% on Friday.

• Non-farm between 0.14 million-0.18 million

JPMorgan estimates the probability of this scenario occurring at 40%. This is also the current market's basic estimate, with employment figures aligning closely with the average levels of the past 3 months, 6 months, and 12 months. This data will support the consensus that U.S. economic growth is above trend and trigger the Federal Reserve to skip interest rate cuts in the January meeting. In this context, the S&P 500 Index is expected to rise by 0.25%-0.50% on Friday.

• Non-farm between 0.1 million-0.14 million

JPMorgan expects the probability of this scenario to be 25%. If non-farm data falls below expectations while the unemployment rate rises, it could reignite concerns about economic growth in the USA; if combined with strong hourly wages, it may lead the market to revive the "stagflation" narrative, though this may require the CPI to significantly exceed consensus values for support. Against this backdrop, the S&P 500 Index is expected to decline by 0.25% to 0.75% on Friday.

• Non-farm <0.1 million

JPMorgan expects the probability of this scenario to be 5%. This would represent another tail risk. JPMorgan points out that although we have recently seen two instances of such low data below 0.1 million (one was a revised figure, and the other was related to severe weather), the market response in both cases was not strong. However, this time, non-farm data below 0.1 million may trigger a stronger negative reaction, as the market may view it as part of an economic slowdown that ultimately leads to a recession, despite the more immediate risk being a stagflation environment. Against this backdrop, the S&P 500 Index is expected to decline by 0.75% to 1.50%.

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