U.S. Nonfarm Payrolls to Be Released Tonight; 'Weak July' Pattern Looms

Original author: Zhang Yaqi

Source: Wall Street Journal

The U.S. July non-farm payrolls report will be released tonight Beijing time. Market consensus expects around 80,000 new jobs, but conflicting signals from leading indicators have led some institutions to project figures significantly below consensus—whether the "weak July" curse can be broken has become the market’s biggest question.

Market expectations ranged widely, from a high of 157,000 to a low of 40,000. Goldman Sachs forecast an addition of 75,000 jobs, slightly below the consensus; Vanguard provided an extremely low estimate of just 18,000, suggesting that spring employment data had been inflated by weather, World Cup-related hiring, and early government recruitment, leading to significant downward pressure in July. Meanwhile, ADP’s private-sector employment data showed only a 44,000 increase, significantly missing expectations and further intensifying concerns over downside risks.

For the Federal Reserve, the current policy focus has clearly shifted toward inflation rather than employment. Several officials have recently described the labor market as "stable"; a strong jobs report will reinforce expectations of higher interest rates being maintained for longer, putting pressure on interest-sensitive assets; conversely, weak data could push market pricing toward more modest rate cuts.

One of the most market-sensitive contexts for this report is the recurring pattern of disappointing employment data in July in recent years.

According to a Goldman Sachs research report, over the past three years, the U.S. non-farm payroll increase in July has averaged 66,000 lower than the three-month average at that time and 35,000 lower than market consensus. These weaker-than-expected figures have been accompanied by significant downward revisions to the data for the two preceding months, with an average revision of 112,000.

Goldman Sachs economists Ronnie Walker and Jessica Rindels cited this pattern as one of the key bases for downside risks in their report. The alternative employment growth indicators they tracked averaged 65,000 in July, below 79,000 in June.

In addition, Barclays analysts noted that the June employment data itself carries a high risk of revision—this data is based on only about half of the usual survey response rate, with the U.S. Bureau of Labor Statistics (BLS) heavily relying on model estimates rather than actual reported data. Barclays expects the revision to be substantial, but the direction remains uncertain.

Not all signals point downward. Several data points provide阶段性 support for the labor market.

The World Cup employment effect is a significant positive factor in Goldman Sachs' forecast. Data from Homebase shows that during the June to July survey reference period, employment growth in World Cup host cities was significantly faster than in other regions; Goldman Sachs estimates this effect contributed approximately 10,000 jobs to the July non-farm payrolls, primarily concentrated in leisure and hospitality, professional and business services, and trade and transportation. However, the same data also indicates that this effect began to fade immediately after the July reference period ended.

Layoff data also shows positive signals. In July, initial claims for unemployment benefits fell to 210,000 during the BLS survey period, down from 224,000 in June; during the specific week of the survey, the figure dropped further to 188,000, the lowest level since September 1969. According to Challenger, Gray & Christmas, the number of announced corporate layoffs in July decreased by 12,000 month-over-month to 33,000, the lowest level since July 2024.

There are also signs of recovery in government hiring. After a sustained contraction of about one and a half years, government employment has added an average of 12,500 new positions per month over the past four months, and government job vacancies have recently rebounded.

A key aspect of the employment report is the trend in the unemployment rate and the underlying changes in labor force participation.

Goldman Sachs expects the unemployment rate to rise slightly from 4.2% to 4.3% in July, above the consensus expectation of no change. Goldman Sachs attributes this, in part, to a reversal of the sharp decline in the labor force participation rate in June, which dropped to 61.5%, the lowest level since March 2021 and the lowest outside of the pandemic since June 1976; the core working-age (25 to 54) participation rate recorded the largest single-month decline since April 2020, excluding pandemic-related drops.

Economists at Vanguard expect upward pressure on the unemployment rate as workers who left the labor force re-enter the job market, but find jobs at a slower pace than their willingness to return, with a year-end unemployment rate forecast of 4.6%.

Citi economist Veronica Clark noted that the labor market is currently in a state of "low hiring, low firing," a dynamic that is particularly unfavorable for new job seekers. She expects the unemployment rate to rise above 4.5% within months, at which point market focus will shift back to expectations of rate cuts; Citi’s baseline scenario anticipates a resumption of rate cuts in the fourth quarter of this year.

The significance of this non-farm payroll data for monetary policy will primarily lie in whether it strengthens or weakens the baseline expectation of "maintaining high interest rates for an extended period."

Chair Powell described the labor market as "solid and stable," Logan called it "solid and slightly improved," Schmid viewed it as "broadly balanced," Paulson and Hammack said it has stabilized, and Barkin used the most cautious language, stating the market "does not feel tight." Overall, officials viewed inflation as a more pressing policy challenge than employment.

Notably, the Oxford Economics Institute points out that despite a 0.4% month-over-month increase in average hourly earnings in July, the annual rate remains at just 3.6%, still in line with the Federal Reserve’s 2% inflation target, and wage pressures are not currently viewed as a significant inflation risk. According to Bloomberg, analysts believe that strong employment data could push up real yields, particularly given Waugh’s earlier statement that “the market has already done part of the Fed’s tightening work.”

JPMorgan Chase's market intelligence team believes this non-farm payroll data will be priced according to the "good news is bad news" logic—strong employment figures will reinforce pricing for higher rates for longer, pushing rates up and pressuring interest-rate-sensitive sectors; if the data is moderately weaker, it could lead to a decline in yields and a slight shift in market pricing toward a more dovish stance, potentially prompting a positive response in equity markets.

JPMorgan provides the following detailed scenario analysis:

• If non-farm payrolls exceed 150,000, the S&P 500 is expected to decline by 50 to 175 basis points, with a 10% probability;
• Non-farm payrolls between 100,000 and 150,000, index down 50 basis points to up 25 basis points, probability 25%;
• Non-farm payrolls between 60,000 and 100,000, index down 25 basis points to up 50 basis points, probability 30%;
• Non-farm payrolls between 20,000 and 60,000, index rises by 25 to 75 basis points, probability 25%;
• Non-farm payroll below 20,000, index drops 125 basis points to up 50 basis points, probability 10%.

The options market has priced in the non-farm payroll data relatively conservatively, with the implied volatility for contracts expiring on August 7 at only about 0.7%, reflecting that market uncertainty has been partially absorbed amid recent easing of geopolitical tensions. As of midday on August 6, the 2-year U.S. Treasury yield declined from a recent high of 4.35% to approximately 4.24%.