The small non-farm payrolls fell short of expectations, will the big non-farm payrolls crash again?

The ADP employment number for August released last night showed an increase of only 54,000 jobs, below the market expectation of 65,000 and less than half of July's 106,000. This is the lowest growth level since January 2025.

Moreover, a dangerous signal is that the proportion of new jobs from small and medium-sized enterprises dropped from 48% in July to 35%, while the proportion from large enterprises rose to 42%. Small and medium-sized enterprises are shrinking their hiring, which is also a sign of economic cooling.

In addition to the ADP, the labor data released this week is also not very optimistic:

1. The JOLTS data released on Wednesday evening showed that the number of job vacancies in July was 7.181 million, a decrease of 176,000 from the revised 7.357 million in June, which was below expectations. A key indicator that the Federal Reserve uses to measure the robustness of the labor market, the ratio of job vacancies to unemployed persons, fell from the revised 1.049 in June to 0.992, marking the first time it has been below 1.0 since April 2021.

1. The employment component of the U.S. PMI survey data released this week also indicates that the employment outlook is not optimistic. The employment component of the August ISM manufacturing index fell to 43.8, and the employment component of the ISM services index fell to 46.5.

1. More frequent weekly employment data also confirms that the labor market is cooling: the number of initial unemployment claims for the week ending August 30 rose to 237,000, higher than the expected 230,000.

2. In the early hours of Thursday, the Federal Reserve released its latest Beige Book, showing that the overall U.S. employment market is stable but slightly weak, concealing some downward risks worth noting. Businesses in 7 districts are cautious about hiring new employees due to weak demand and economic uncertainty; 2 districts reported increased layoffs; most districts mentioned an increase in the number of job seekers.

After this week's employment data, the 1-year SOFR fell to 3.71%, and the market has priced in a 97% probability of a Federal Reserve rate cut in September, nearly fully priced in, with expectations for 2.3 rate cuts this year. Considering that the market is still leaning towards trading in the direction of a Federal Reserve rate cut, Friday's non-farm payroll data will have an asymmetric impact on the dollar:

• If Friday's non-farm payroll data again falls short of expectations, the market may price in three rate cuts;
• However, if the non-farm payroll exceeds expectations, people may also question the authenticity of the non-farm data and choose to short the dollar at higher levels after the data release

In addition to Friday's non-farm payroll data, there are two key events to watch for next week:

First, pay attention to the dynamics of Japanese politics over the weekend. Next Monday, September 8, is the deadline for the Liberal Democratic Party to submit a written application for early elections. If more than half of the 342 members submit a written application (i.e., 172 members), an early election will be held within the party. According to Yomiuri Shimbun, 128 votes have already been cast in support of holding an early leadership election.

Recently, the yen has not appreciated despite the rising expectations of interest rate cuts by the Federal Reserve; the USDJPY and the divergence in the US-Japan interest rate differential is due to Japan's own political risks.

• If the vote on September 8 does not pass for early elections, Shigeru Ishiba will temporarily overcome this "palace coup" crisis. Concerns about Japanese politics will ease temporarily, which will be favorable for the yen.
• If the vote on September 8 passes the motion for early elections, the leadership election will be held from mid to late September, and the era of Shigeru Ishiba may come to an end, which will be unfavorable for the yen.

Second, pay attention to the annual benchmark revision of non-farm employment to be announced on September 9. Some foreign capital, based on wage survey data, expects a downward revision of 600,000 to 900,000 jobs for the 12 months from April 2024 to March 2025. If such a significant downward revision occurs, the dollar will face selling pressure again.

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