How bad does this week's non-farm payrolls need to be for the Federal Reserve to cut interest rates by 50 basis points?

This Friday's U.S. non-farm payroll report is becoming the focus of investors, as its results may directly determine whether the Federal Reserve will take more aggressive action with a 50 basis point rate cut in September.

According to the latest analysis by Steve Englander, the global foreign exchange research head at Standard Chartered Bank, to bring the possibility of a 50 basis point rate cut to the forefront, the market needs to see the August non-farm payroll (NFP) increase below 40,000, and the unemployment rate rise to 4.4% or higher.

According to a Bloomberg survey, economists' median forecast for the August non-farm payroll increase is 75,000. If the actual data falls below 40,000 as Englander predicts, it would constitute a significant downside surprise, almost certainly triggering market bets that the Federal Reserve will adopt a more decisive easing policy.

A deeper issue is that some analysts have raised strong doubts about the accuracy of the official data from the U.S. Bureau of Labor Statistics (BLS), believing it may continue to overestimate real employment growth.

Regardless of the numbers released this week, a debate about the true state of the labor market has been brewing, and the upcoming annual benchmark revision may force the Federal Reserve to confront a labor market that is weaker than it appears on the surface.

Key Threshold for a 50 Basis Point Rate Cut: Data "Sufficiently Bad"

The market generally believes that a weak employment report will increase the likelihood of a Federal Reserve rate cut, but to trigger a 50 basis point cut, the data needs to be "sufficiently bad."

Steve Englander's analysis provides specific quantitative indicators for the market. He points out that if the August non-farm payroll increase is below 40,000, the market will begin to lean towards pricing in a 50 basis point rate cut.

Analysis suggests that the balanced growth level of the U.S. labor market at this stage is approximately between 50,000 and 100,000 jobs per month. Therefore, any reading below 40,000 will be seen as a clear signal of a substantial slowdown in the labor market.

Of course, non-farm data needs to be interpreted in conjunction with the unemployment rate. The market expects the unemployment rate for August to be 4.3%, but Englander believes that merely reaching a cyclical high of 4.3% is not sufficient to guarantee a 50 basis point rate cut unless the new job numbers are also extremely weak.

However, if the unemployment rate rises further to 4.4%, then unless the new employment data is exceptionally strong, the likelihood of a 50 basis point rate cut will increase significantly. Conversely, to completely dispel market expectations for a rate cut, the new job numbers would need to exceed 130,000, along with an upward revision of the previous value.

"Pitfalls" Behind the Data

Beyond setting specific thresholds, Englander also expressed strong disagreement with the current market and policymakers' interpretation of labor data, arguing that these widely watched indicators are highly misleading and underestimate the softness of the labor market.

One point of contention is the unemployment rate. Over the past 14 months, the official unemployment rate has remained within a narrow range of 4.1% or 4.2% for 13 months, showing no clear trend. However, in Englander's view, this is a misleading signalHe pointed out that the employment-population ratio has been steadily declining during the same period, which is more likely to indicate a real weakness in the labor market. Although the current data is far from the sharp deterioration seen in 2008-2009 or 2020, the downward trend is already very evident.

Another more controversial viewpoint directly targets the non-farm employment data itself.

Englander believes that the "birth-death adjustment" used by the Bureau of Labor Statistics in data collection severely distorts the results. This model is designed to estimate the net employment changes brought about by newly established and closed businesses, but he estimates that over the past year, the model may have overestimated about 70,000 jobs on average each month.

Annual Benchmark Revision of Non-Farm Employment is Crucial

Based on criticisms of the "birth-death adjustment," Englander estimates that the real monthly job additions among newly established companies may not exceed 20,000.

This means that the officially released non-farm data needs to be viewed with a "discount." For example, a seemingly robust non-farm report with a published value of 100,000 people may reflect a real employment growth of close to 30,000. Even if the published figure reaches 170,000, the real growth may only be around 100,000, just touching the threshold needed to maintain market balance.

This ongoing systemic overestimation will eventually need to be corrected to reflect reality.

Analysis points out that the annual benchmark revision of non-farm employment scheduled for release by the Bureau of Labor Statistics on September 9 may become a key event. If there is a significant downward revision at that time, it will confirm the market's speculation of data overestimation, which could serve as another catalyst for the Federal Reserve to adopt more aggressive easing policies