Friday's non-farm payrolls hard to prevent September rate cut? Bank of America Merrill Lynch: The key lies in the unemployment rate and previous value revision

The U.S. employment report released on Friday may show a moderate recovery in the labor market, but this may not be enough to change the Federal Reserve's expectations for interest rate cuts.

According to Wind Trading Desk, Bank of America Merrill Lynch analyst Shruti Mishra stated in a recent research report that stronger-than-expected job growth may struggle to shake the market's pricing for a rate cut in September, as potential signs of weakness and the dovish stance of the Federal Reserve Chairman have already paved the way for policy easing.

Bank of America expects that the U.S. non-farm payrolls for August, to be released on Friday, will increase by 90,000, higher than July's 73,000 and the market's general expectation of 75,000. The bank noted that although the four-week average of initial jobless claims remains at a moderate level and the number of continuing claims has decreased, these factors collectively support the judgment of a slight acceleration in job growth.

However, the report emphasizes that the market focus will be on the revision of July's non-farm payrolls. Given that the initial values for each month this year have been revised down, and the lower response rate of the survey in July, there is a possibility that this data could be significantly revised down, which may reveal a more persistent weakness in the labor market than expected.

Federal Reserve Chairman Powell's dovish remarks at the Jackson Hole Global Central Bank Conference have already set the tone, indicating that very strong data is needed to prevent a rate cut in September. The report believes that although the official forecast remains "to keep rates unchanged," the risks have "clearly shifted to the side of a rate cut."

Risk of Downward Revision for July Non-Farm Payrolls

The trend of historical data revisions has become key to assessing the true health of the U.S. labor market.

The report emphasizes that the significant downward revisions of non-farm payrolls for May and June have lowered the average growth for these two months to only 33,000. Whether the initial value of 73,000 for July can hold is facing significant uncertainty.

Data in the report shows that the response rate of the survey report initially released in July was only 57.6%, significantly lower than May's 68.4% and June's 59.5%. Since every non-farm data initial value released in 2025 has been subsequently revised down, the market has reason to worry that July's data will repeat this pattern.

The report warns that if July's data is revised down again, it may indicate that "the weakness in the labor market is more persistent than we expected."

Rate Cut Threshold: What Does the Federal Reserve Need to See?

After Powell sent dovish signals at the Jackson Hole Conference, the data threshold to prevent a rate cut in September has been significantly raised. The report clearly states that data is now needed to justify the rationale for "not cutting rates."

According to the bank's analysis, an employment report that could allow the Federal Reserve to "keep rates unchanged" needs to meet the following conditions: the unemployment rate in August must remain at 4.2% or lower, job growth must exceed 70,000, and the data for July should have only minimal downward or upward revisions. The unemployment rate will become a key variable: if the unemployment rate drops to 4.1%, the requirement for job numbers will decrease; but if the unemployment rate rises to 4.3%, the requirements will increase significantly.Ultimately, if the data is in a "ambiguous" gray area, the inflation data for August will also be a decisive factor.

August Non-Farm Employment Data Expected to be "Mixed"

Delving into the industry level, the employment market in August shows structural differentiation. The report predicts that some sectors will have highlights, while others will continue to show signs of weakness.

On the positive side, government employment is expected to increase by 5,000 jobs in August after a decrease of 10,000 in July. Additionally, employment in the tourism and hospitality sectors, which averaged only 9,000 new jobs in June and July, is expected to see a slight rebound in August. This optimistic expectation is supported by the fact that airport passenger traffic has exceeded the levels of the same period in 2024 for most of August, indicating a recovery momentum in leisure travel.

However, on the other side, structural weakness cannot be ignored. The report points out that the professional and business services sector may still experience weak hiring after three consecutive months of layoffs, attributed to the accelerated application of AI and a low liquidity labor market. At the same time, employment in the manufacturing sector is also expected to remain weak due to labor supply shocks and tariff uncertainties.

In terms of wages, Bank of America expects that the month-on-month growth of average hourly wages in August will remain at 0.3%, with the average weekly working hours stabilizing at 34.3 hours