Under the storm of DOGE layoffs, the non-farm payroll report is about to be released. Will the U.S. stock market be "worsened" tonight?

The U.S. non-farm payroll data for February will be released tonight, with the market generally expecting employment growth to remain robust. However, factors such as federal government layoffs and tightening immigration policies may put pressure on job creation in the coming months. Some even believe that as the impact of DOGE layoffs continues to become evident, the February non-farm report may be the last healthy non-farm report.

The U.S. Department of Labor will release the February non-farm employment report at 8:30 PM Beijing time on Friday. According to data compiled by FactSet, the market expects an increase of 160,000 in non-farm payrolls for February, a rebound from January's 143,000, but below the three-month average of 237,000. Meanwhile, the unemployment rate is expected to remain at a low of 4.0% for eight months, while the month-on-month growth rate of hourly wages is expected to slow from 0.5% in January to 0.3%.

Gus Faucher, chief economist at PNC Financial Services Group, stated that a job growth of 160,000 "aligns with the Federal Reserve's expectations and is consistent with labor force growth." Bill Adams, chief economist at Comerica Bank, pointed out that although the pace of job growth has slowed compared to last year, the growth of the labor force has also slowed due to tightening immigration policies, and he expects the job growth in February to "be sufficient to keep up with this trend."

February Non-Farm Growth May Be Moderate, Impact of DOGE Layoffs Begins to Show

Previously, the labor market significantly cooled in January due to weather factors, but the situation in February may have improved. Goldman Sachs noted that despite lower winter temperatures, snowfall was less than usual, and the impact on job growth is expected to be neutral. Additionally, the influx of immigrants and replacement hiring will continue to support the job market, although the growth rate may slow.

The main drag is the wave of layoffs initiated by DOGE in the federal government. Goldman Sachs' latest report estimates that the federal government's layoff plans, hiring freezes, and delayed retirement plans are expected to drag down February employment data by about 10,000 jobs.

According to February data, the number of federal employees applying for unemployment insurance only slightly increased, indicating that the number of layoffs at that time was not sufficient to significantly impact February's job growth. Although about 75,000 federal employees accepted the proposal for delayed retirement, Goldman Sachs believes this will not affect February's employment statistics, as these employees will still be counted in the employment numbers until they actually retire on September 30.

Goldman Sachs expects that the loss of personnel due to hiring freezes may have a moderate impact on federal employment of about 10,000 jobs. Although the average monthly hiring number for the federal government over the past six months has been about 30,000 according to the JOLTS report, Goldman Sachs believes this number has limited impact on February's job growth.

One reason is that some positions are not affected by the hiring freeze, such as healthcare positions at the Department of Veterans Affairs. Another reason is that retirees typically account for half of the federal government's departures, but some who originally planned to retire may have accepted the proposal for delayed retirement, so they will still be counted as employed.

The unemployment rate is expected to remain at a low level of 4.0%, which has persisted for eight months. Capital Economics believes that although the number of immigrants continues to decline, the slowdown in labor force growth will help keep the unemployment rate stable However, the Conference Board's survey data shows that the difficulty for households to find jobs has increased this year, which may pose upward pressure on future unemployment rates.

Layoff "Sword" Down, the Last Healthy Non-Farm Report?

Affected by the federal government's "downsizing" plan, economists are beginning to reassess their forecasts for continued strong growth in the U.S. labor market through 2025.

According to predictions from Wall Street firms such as Jefferies, Evercore ISI, and Barclays, the total number of layoffs by the federal government could exceed 500,000 by the end of this year, a figure that would offset a quarter of the total employment growth in the U.S. in 2024. Although the upcoming February non-farm employment report may only show limited effects from layoffs, the actual impact is expected to be reflected in the data for March and April.

The wave of layoffs is not limited to the federal government. Private companies working with the government are also ramping up layoffs due to the federal government canceling contracts. For example, DAI Global LLC, a contractor for the U.S. Agency for International Development, laid off over 500 employees due to the federal government defaulting on payments, and consulting firm EnCompass LLC also laid off nearly 200 people due to funding freezes.

Citigroup expects that although the unemployment rate is projected to remain at a relatively stable level of 4.1%, February may be the last month of “healthy” employment data, the employment environment may further deteriorate in spring and summer, with federal government layoffs and cuts in government funding posing additional downside risks, and the unemployment rate may rise to about 5% by mid-year.

Citigroup warned:

It is expected that the loss of about 300,000 positions in federal departments may begin to be reflected in labor market data starting in March/April and continue until September/October. Depending on changes in labor force participation rates, the direct loss of 300,000 positions could lead to an increase in the unemployment rate of 0.1-0.3 percentage points.

If Non-Farm Data Falls Short, Will U.S. Stocks Suffer More?

Despite Wall Street consensus expecting an addition of 160,000 jobs, multiple analysts believe the results may fall short of expectations, insufficient to alleviate investors' growing concerns about the U.S. economy and consumer health.

Jacobsen from Annex Wealth predicts that non-farm employment will be close to 125,000 and expects that job growth in March may even be below 100,000. Thomas Simons from investment bank Jefferies is even more pessimistic, forecasting that job positions will only increase by 115,000 to 120,000 The market's reaction to employment data may exhibit asymmetry: negative data is likely to exacerbate stock market corrections, while positive data may only provide a temporary boost to market sentiment. Ryan Jacobs, founder of Jacobs Investment Management in Florida, pointed out:

Negative employment reports may be seen as the "tip of the iceberg," leading to adjustments in the stock market over the next few quarters.

Regarding the performance of U.S. stocks tonight, Goldman Sachs' trading team noted that non-farm data is currently viewed as a "binary event" for risk assets. In the context of weak stock market performance, strong data may boost market confidence, while weak data could trigger further sell-offs. Pricing in the options market indicates that the market's expectations for volatility around non-farm data have reached their highest level since August of last year.

Cullen Morgan from Goldman Sachs stated, U.S. stocks are currently in a state where "good news is good news, bad news is bad news," and options pricing indicates that the market expects non-farm data to trigger a 1.65% volatility in the S&P 500. Specifically:

When the number of new jobs is less than 50,000, the S&P index is expected to drop by 2.5%.

When the number of new jobs is between 50,000 and 100,000, the S&P index is expected to drop by 1.00%.

When the number of new jobs is between 100,000 and 150,000, the S&P index is expected to drop by 0.75%.

When the number of new jobs is between 150,000 and 200,000 (assuming GSe is 170,000), the S&P index is expected to rise by 1.25%.

When the number of new jobs is greater than 200,000, the S&P index is expected to rise by 2.00%.

In the face of the uncertainty surrounding non-farm data, investors need to be cautious in their positioning. Ryan Hammond from Goldman Sachs believes that if the data is strong, consumer stocks and cyclical stocks may become the main beneficiaries of a rebound. However, if the data is weak, U.S. stocks may face further downward pressure, especially in sectors sensitive to economic growth. Additionally, the relative attractiveness of European markets is also rising, particularly against the backdrop of lowered expectations for U.S. economic growth