Will Tuesday's Non-Farm Payroll Save the U.S. Stock Market? Morgan Stanley Chief: Weak Employment May Help the Stock Market Rise

U.S. stocks failed to rebound on Monday, with the three major indices collectively closing lower for two consecutive trading days. Investors are turning their attention to the non-farm payroll report, which has been delayed due to the U.S. federal government shutdown, seeking opportunities for a market rebound. This significant report, which is set to be released on Tuesday, could provide key clues for the Federal Reserve's interest rate path next year.

Morgan Stanley's Chief U.S. Equity Strategist Michael Wilson believes that if the report shows moderately weak U.S. employment data, it may actually boost the stock market. He pointed out that the market has returned to a state where good news for the economy is bad news for the stock market, and vice versa. He explained that while a robust labor market is beneficial for the economy, it reduces the likelihood of the Federal Reserve cutting interest rates next year.

According to the median consensus expectation from a Bloomberg survey, economists expect that non-farm payrolls in November will increase by 50,000, and the unemployment rate will rise to 4.5%, the highest since 2021. Due to the government shutdown, the U.S. Bureau of Labor Statistics (BLS) has interrupted data collection, and this report will include some data from both October and November, but will not publish household survey statistics such as the unemployment rate for October.

The delayed non-farm payroll report coincides with the Federal Reserve's third consecutive 25 basis point rate cut. When the Fed announced the rate cut last Wednesday, it also disclosed an updated economic outlook, with officials generally expecting U.S. GDP to grow by 2.3% next year and inflation to slow to 2.4%. Although the dot plot indicates that most Fed officials expect only one rate cut of about 25 basis points next year, traders are currently betting on two rate cuts.

Weak Data May Be a Positive

Wilson noted in his research report that while a strong labor market is beneficial for the economy, it lowers the probability of rate cuts next year. Conversely, weak labor market data would increase the likelihood of further rate cuts next year, thereby providing support for the stock market.

Citi's strategists also hold an optimistic view. The team led by Citi's Chief U.S. Equity Strategist Scott Chronert expects the S&P 500 index to rise by 12% to 7,700 points by the end of 2026. Strong earnings growth and expectations of loose monetary policy are at the core of this forecast. The team stated, "Overall supportive Fed policy is a key assumption in our forecast."

The MSCI Global Market Index reached a record high after the Fed's rate cut last Wednesday. Boosted by optimism surrounding advancements in artificial intelligence (AI) and the prospects of loose monetary policy, the S&P 500 and Nasdaq 100 indices have risen nearly 16% and nearly 20%, respectively, so far this year.

Multiple Uncertainties in the Report

Due to the record 43-day duration of the U.S. federal government shutdown, this non-farm payroll report is filled with anomalies. The BLS extended the data collection period for November to allow sufficient time to gather data after the government shutdown, but it cannot retroactively collect household survey data for October.

After the September non-farm payrolls significantly exceeded expectations, some economists predict that the November non-farm payroll report will show negative growth in October non-farm payrolls due to mass layoffs in the federal government, as tens of thousands of government employees accepted the "voluntary separation program" and left after September 30 The U.S. Office of Personnel Management (OPM) previously stated that approximately 144,000 government employees participated in the delayed resignation program. Goldman Sachs economists expect this will reduce October employment by 70,000 and another 10,000 in November.

However, most economists anticipate that non-farm employment will return to positive growth in November. Nancy Vanden Houten, chief U.S. economist at Oxford Economics, expects healthcare and private education services to drive job growth for the month. Economists' expectations range from a decrease of 20,000 to an increase of 127,000, indicating high uncertainty in the market.

Unemployment Rate Expected to Reach Four-Year High

The BLS will not release the October unemployment rate in this report. Economists expect the unemployment rate to rise further to 4.5% in November, following an unexpected slight increase to 4.4% in September, marking the highest level since 2021. Over the three months ending in September, the unemployment rate has continued to rise due to a sluggish hiring environment and an increase in labor force participation. Announced layoffs have also surged recently, with the layoff indicator in October reaching its highest level since early 2023.

The Bloomberg economic research team pointed out that there will be no unemployment rate data for October, and the collection period for November data is later than usual, which may lead to the "technical" issues mentioned by Powell, such as problems with seasonal adjustments. Some forecasters suggest that the decrease in federal government employment could put upward pressure on the November unemployment rate, which could rise to 4.6%.

A team led by Sarah House, chief economist at Wells Fargo Securities, commented: "We believe that (the data) will increasingly show that 'full employment' in the Fed's dual mandate is in jeopardy."

Policy Impacts Continue to Emerge

The latest employment report will reflect the impact of the Trump administration's economic policies and other factors on the job market.

Media reports indicate that many companies have scaled back hiring due to the uncertainty brought about by the Trump administration's plans to impose high tariffs on nearly all countries. His crackdown on immigration has also had a significant impact on the labor market, leading to shortages in certain industries. Additionally, some companies have laid off workers due to the adoption of AI technology.

Brian Wesbury, chief economist at First Trust Advisors, wrote in a commentary: "Given the significant policy shift from lenient to strict immigration enforcement, the Trump administration's efforts to streamline government staffing, and layoffs caused by an aging population and AI, job growth should be slow."

Daniel Zhao, chief economist at Glassdoor, stated, "The scale of the BLS employment report is so large, and government shutdowns are infrequent, that there is always some uncertainty when facing the employment report. I think we should remain humble when reviewing the report and be prepared for any situation."

On Tuesday, the U.S. Department of Commerce will also release October retail sales data. Economists expect retail sales, excluding automobiles and gasoline, to accelerate, indicating robust consumer demand at the beginning of the fourth quarter. Later this week, the BLS will also release the November CPI; due to the government shutdown, October price data cannot be collected, and the report will not include month-on-month data, requiring investors to rely on year-on-year CPI growth data to gauge inflation direction