The tariff effect remains unclear, tonight's non-farm payrolls must be "bad enough but not collapsing"!

The U.S. non-farm payroll data for July will be released tonight. This is not only a check-up to assess the temperature of the labor market but also a key clue in determining whether the Federal Reserve will begin to cut interest rates in September. In the current context where the transmission of tariffs to inflation is still unclear, a "sufficiently weak but not terrible" employment data may be the result the market most wants to see.

The U.S. Bureau of Labor Statistics will release the July non-farm payroll report at 8:30 AM on Friday. The market generally expects that the non-farm payrolls will increase by 104,000 in July, down from 147,000 in June and below the three-month average of 150,000 and the twelve-month average of 151,000.

The unemployment rate is expected to rise to 4.2% (previously 4.1%), which, although slightly worse, is still below the Federal Reserve's year-end median forecast of 4.5%. Average hourly earnings are expected to grow by 0.3% month-on-month, and the average workweek is expected to remain steady at 34.2 hours.

Federal Reserve Chairman Jerome Powell previously stated that the unemployment rate is a key indicator for observing the labor market. Currently, most Federal Reserve officials believe the labor market is close to or at full employment. Richmond Fed President Barkin suggested that the breakeven point for the current job market is about 80,000 to 100,000 jobs per month.

Goldman Sachs believes that if the number of new jobs falls within the range of 75,000 to 124,000, the S&P 500 index will react positively, while JPMorgan is more optimistic, predicting that the market will respond positively to any data above 100,000 .

Mixed Signals from Leading Indicators, but Downward Trend is Consensus

From various leading indicators, signals of a cooling job market are becoming increasingly clear:

The number of initial jobless claims fell to 221,000 during the survey week for the employment report, a significant decrease from the 246,000 in the previous month’s reference period. Continuing jobless claims dropped from 1.964 million to 1.946 million. The decline in continuing claims may indicate that previously hard-to-re-employ jobless individuals have found work.

The S&P Global Flash PMI report shows that employment has increased for the fifth consecutive month, as companies hire more employees due to increased backlogs. However, the ADP National Employment Report and the June JOLTS job openings report both showed weakness. The number of layoffs reported by Challenger increased by 62,000 in July, up from 48,000 in June.

The labor market differential from the Conference Board (the proportion of respondents who believe jobs are plentiful minus those who believe jobs are hard to find) fell again in July to a new cycle low of 11.3 percentage points, far below the 33.2 percentage points average level in 2019.

Seasonal "Drag" from Government Sector, Focus Returns to Private Sector

Bank of America expects 60,000 new jobs in July, below the market consensus, mainly dragged down by a decline in government sector employment. The institution expects government employment to decrease by 25,000, primarily as a correction to the surge in state and local education services employment in June. In June, employment in this sector grew by 64,000, far exceeding the previous five-month average increase of 13,000.

Morgan Stanley expects 100,000 new jobs, with 100,000 in the private sector and government employment remaining flat. Morgan Stanley predicts that government employment in July may remain basically unchanged, with the federal government expected to reduce about 20,000 due to layoff plans, offset by hiring at the state and local levels Therefore, the real focus of this non-farm report is the increase in private sector employment, which MS estimates to be +100k. Considering the continuous decline in initial jobless claims and the fact that immigration policies have not yet been fully implemented, some industries (such as healthcare, education, and leisure services) may still maintain positive growth.

Analysts point out that tariff policies may have a negative impact on manufacturing employment in the coming months. Manufacturing employment decreased by an average of 5,000 jobs per month in the second quarter, with an average monthly decrease of 9,000 jobs expected for the entire year of 2024.

The tightening of immigration policies is expected to affect industries that rely on immigrant labor. Employment growth in industries most sensitive to changes in immigration policy has dropped from an average of 27,000 jobs per month in 2024 to 7,000 jobs based on the average over the past three months in May.

Bank of America believes that it may be too early to see substantial effects of immigration restrictions in July, considering the delays in implementation and legislation. However, the institution expects that immigration restrictions will ultimately have a negative impact on industries such as leisure and hospitality.

Can a "weak enough" non-farm report stabilize rate cut expectations?

The Federal Reserve hopes to see a "return to balance in the labor market," rather than a cliff-like deterioration. The market feels the same: if the data is too strong, rate cut expectations will have to be retracted; if it is too weak, recession fears will rise again.

Goldman Sachs trader Cullen Morgan provided a more conservative market reaction matrix:

• Above 150,000: S&P 500 index up or down 0.25%;

• Between 125,000 and 150,000: S&P 500 index up or down 0.25%;

• Between 100,000 and 124,000: S&P 500 index up 0.4%;

• Between 75,000 and 99,000: S&P 500 index up 0.25%;

• Between 50,000 and 74,000: S&P 500 index down 0.5%;

• Below 50,000: S&P 500 index down 0.75%.

In contrast, the market intelligence team at JP Morgan provided a more optimistic reaction matrix:

• Above 140,000 (5% probability): S&P 500 index up 1%-1.5%;

• Between 120,000 and 140,000 (25% probability): S&P 500 index up 1.25%;

• Between 100,000 and 120,000 (40% probability): S&P 500 index up 25-75 basis points;

• Between 80,000 and 100,000 (25% probability): S&P 500 index down 1%;

• Below 80,000 (5% probability): S&P 500 index down 1.5%-2.5%.

Vickie Chang from Goldman Sachs Global Macro Research pointed out that the market is currently pricing in about 2% growth for the next year, higher than its recent forecast of 1.4%. Although the growth pricing is not overly optimistic relative to the medium-term outlook, the current pricing is more relaxed, making the market more susceptible to weak data that catalyzes a slowdown narrative