Tonight's non-farm payroll report, ushering in the second major cooling down of the year?

After Federal Reserve Chairman Powell concluded his trip to Europe, global financial markets anxiously await the June non-farm payroll report to be released tonight. Wall Street forecasts indicate that the US job market in June may see a significant cooling off, with both new job additions and wage growth significantly declining.

At 20:30 Beijing time on Friday, the US Department of Labor will release the June non-farm payroll report.

Wall Street predicts that the number of non-farm jobs in June will increase by 190,000, a significant drop from May's 272,000, only slightly higher than the data in April for the year. This will be the second major cooling off in non-farm employment this year (the first major cooling off was in April, with a significant shortfall of 175,000 new jobs compared to expectations for that month). At the same time, this number is also lower than the average levels of the past 3 months, 6 months, and 12 months (24.9 thousand, 25.5 thousand, and 23 thousand respectively).

It is expected that the unemployment rate in June will remain unchanged at 4.0%, consistent with the Federal Reserve's forecast for 2024.

In terms of average hourly wages, the year-on-year growth rate may slow down from 4.1% in May to 3.9%, potentially falling below 4% for the first time since 2021, with a month-on-month growth rate of 0.3%, lower than May's 0.4%. Slower wage growth may alleviate the Fed's concerns about inflation pressure.

Additionally, the labor force participation rate is expected to increase slightly from 62.5% in May to 62.6%, potentially reversing the downward trend in May.

Considering the significant cooling off in the job market, analysts Anna Wong, Stuart Paul, Eliza Winger, and Estelle Ou wrote in a forward-looking report released on Friday:

Overall employment data may indicate that the Fed can patiently cut interest rates, but the recent rise in the unemployment rate suggests a more urgent pace for the Fed's rate cuts. We believe that the Fed will have enough evidence to start cutting rates at the FOMC meeting in September.

Leading indicators show a significant cooling off in the labor market

Before the release of the heavyweight non-farm payroll report, other key leading indicators all suggest that there will be a significant loosening in the labor market in June:

The number of initial claims for unemployment benefits in the first week of June was 239,000, higher than May's 216,000. The number of continued claims for unemployment benefits also rose to 1.839 million, higher than the previous month's 1.79 million.

ADP's private sector employment in June increased by 150,000, slightly below the expected 160,000. It is worth noting that ADP's report shows that the annual wage growth for retained employees has dropped to 4.9%, the lowest level since August 2021.

The employment sub-indices of the ISM manufacturing and services PMIs are both in contraction territory, reflecting a possible weakening in business hiring intentionsThe May JOLTS report shows a slight increase in job vacancies to 8.14 million, but still below the level of the same period last year. The job vacancy rate is 4.9%, still higher than pre-pandemic levels.

In June, Challenger Enterprises cut 49,000 jobs, a 19.8% decrease year-on-year, but the cumulative number of job cuts in the first half of the year still reached 435,000.

Additionally, data from the U.S. Congressional Committee shows that consumers' assessment of the current labor market conditions improved in June, but future expectations remain cautious.

In the already published investment bank forecasts, Goldman Sachs has given a more pessimistic prediction, expecting an increase of only 140,000 jobs. Goldman Sachs' big data indicators show that job creation speed during the spring hiring season is below normal levels, and there may be some statistical bias in May data.

Goldman Sachs pointed out in the report that the unusually long survey period in May may have led to some employment growth being counted early, which means there may be a certain degree of pullback in June data. At the same time, budget pressures faced by state and local governments may have a negative impact on public sector employment. Despite a recent slowdown in immigration growth, the supply of foreign-born labor remains higher than in previous years, continuing to have a subtle impact on the job market.

There may be significant differentiation in employment by industry: the leisure and hospitality industry is expected to maintain relatively strong momentum, while other industries such as technology and manufacturing may face greater employment pressure.

Will non-farm payrolls return to normal in June?

In recent months, the U.S. non-farm payroll reports have frequently contradicted Wall Street, with employment data showing inconsistencies (for example, in May, new non-farm employment far exceeded expectations, but the unemployment rate rose to a two-year high), leading to doubts within the industry about the authenticity of U.S. non-farm employment data.

Looking into the reasons behind this, the non-farm report is actually based on two independent surveys: one is an establishment survey used to determine the number of employed persons, and the other is a household survey used to calculate the unemployment rate.

Over the past year, the results of these two surveys have been vastly different. The establishment survey shows an increase of about 2.8 million employed persons in the past 12 months, but the household survey used to calculate the unemployment rate only increased by 376,000.

Many Federal Reserve officials have emphasized that non-farm employment numbers so far this year have unexpectedly been strong. However, if the employment numbers announced this time are below 200,000, they will be more consistent with the recent household survey results.

In response to this, Stephen Stanley, Chief U.S. Economist at Santander Capital Markets, pointed out in a report released on July 3rd:

The household survey results in May were weak, almost entirely due to the incredible sharp decline in employment among the 20 to 24 age group.

He expects this abnormal phenomenon to disappear in June, and the sub-employment indicator may experience a significant rebound.

If employment remains weak in June, will the Fed cut rates in September?

Federal Reserve officials generally believe that rate cuts can only occur if inflation continues to cool and the labor market continues to gradually rebalance. If there is an unexpected weakness in the labor market, the rate cut plan may accelerate.

Powell stated on Tuesday that despite the cooling labor market, it remains strong. However, Powell reiterated that any unexpected weakness in the job market could trigger the Fed to adopt a more accommodative policy. However, he had previously stated that minor changes in the unemployment rate are not enough to constitute such unexpected weakness.

Currently, the market expects the Fed to cut rates twice this year, with the first rate cut possibly in September or November. If employment data falls significantly below expectations, the Fed may even start a rate cut cycle in July.

The CME Group's FedWatch tool shows that the probability of a rate cut in July is less than 10%, with probabilities of rate cuts in September and November at 66.5% and 51.4%, respectively.

How does the non-farm payroll affect the market?

Analysis suggests that if non-farm payroll data exceeds expectations, coupled with strong wage inflation data, it may dampen expectations of a Fed rate cut in September and inject new vitality into the US dollar. This could in turn trigger a pullback in the Euro/USD exchange rate to 1.0700.

However, if the labor market weakens, expectations of a Fed rate cut may increase, causing the US dollar to fall again. In this scenario, the Euro/USD may break through the level of 1.0850.

For the US stock market, strong employment data may be seen as a signal of economic resilience, driving stock prices higher. However, it may also exacerbate concerns about the Fed's "higher for longer" interest rate policy, especially growth stocks may come under pressure. Conversely, if the data shows significant weakness, the market may bet on an early Fed rate cut, providing support for the stock market