Tonight's Non-Farm Payroll: How "bad" do the data need to be to trigger a 50 basis point rate cut?

The cooling trend in the U.S. labor market is facing a critical test, with the August non-farm payroll report set to be released tonight at 20:30, which will reveal the true pace of economic slowdown for investors. The market is holding its breath, assessing whether this data is sufficient to prompt the Federal Reserve to initiate a significant 50 basis point rate cut.

Market expectations are generally that the August non-farm payrolls will increase by 75,000, roughly in line with the weak growth of 73,000 in July, while the unemployment rate is expected to rise slightly to 4.3%. Following Federal Reserve Chairman Jerome Powell's dovish signals at the Jackson Hole Global Central Bank Conference, the market has largely priced in expectations for a 25 basis point rate cut in September.

However, an extremely poor report could lead Powell to opt for a 50 basis point cut. According to Standard Chartered Bank's analysis, to put a 50 basis point cut "on the table," investors may need to see non-farm payrolls below 40,000, with the unemployment rate reaching or exceeding 4.4%.

In addition to the new job numbers, investors will closely monitor the revisions to data from previous months. The July report's significant downward revisions to employment numbers for May and June shocked the market and became an important catalyst for the Fed's policy shift. Additionally, the U.S. Bureau of Labor Statistics is set to release the preliminary annual benchmark revision next week, which could also trigger another "black swan" event in the market.

The options market pricing reflects an unusually calm expectation, with data showing that traders anticipate the S&P 500 index's volatility on the report release day to be only about 0.70%, which would be one of the lowest volatilities on a non-farm payroll day in history.

Market Expectations: Slowing Growth, Rising Unemployment

According to a comprehensive market survey by the media, economists expect the U.S. economy to add 75,000 non-farm jobs in August, with a forecast range between 0 and 144,000. The unemployment rate is expected to rise from 4.2% in July to 4.3%, still below the Fed's forecasted median of 4.5% by year-end. In terms of wage growth, average hourly earnings are expected to increase by 0.3% month-on-month, while the year-on-year growth rate is expected to slow from 3.9% to 3.8%.

Market baseline expectations for this report are already quite pessimistic. The July non-farm payroll report was extremely weak, with only 73,000 new jobs added, while the data for the previous two months (May and June) was revised down by a total of 258,000, revealing that the labor market is much cooler than initially thought. Powell also acknowledged the downside risks in the labor market after this report and regarded the unemployment rate as a core indicator that needs attention.

When interpreting the August data, several special factors need to be considered. First is the "early August value deviation," historical data shows that the initial value of the non-farm payroll report in August often tends to be weak, and is subsequently revised upward. In the past 15 years, in 10 of those years, August job growth fell below market expectations, which may be partly attributed to seasonal adjustment factors.

Secondly, government policies are having a direct impact on the job market. The federal hiring freeze and layoffs implemented by the Trump administration are expected to continue to weigh on federal employment numbers. Goldman Sachs predicts that government employment will decrease by 20,000 in August. Additionally, the slowdown in immigration policies may also affect industries that heavily rely on immigrant labor, with job growth in these sectors slowing from an average of 27,000 per month in 2024 to 4,000 per month in the second quarter of this year.

Leading Indicators Weakening Across the Board

As previously noted in our articles, a series of leading indicators have painted a bleak picture for the market ahead of the official report release:

• Initial Jobless Claims: During the NFP survey period, both weekly initial jobless claims and continuing claims have increased.
• “Small Non-Farm” ADP Employment Numbers: ADP private sector employment increased by only 54,000 in August, far below the previous value of 106,000. The employment indices in the ISM manufacturing and non-manufacturing PMIs, although not significantly changed, remain in the contraction zone.
• Challenger Report: The August Challenger Report in the U.S. shows that corporate hiring intentions have dropped to the lowest level for August since 2009, with a surge in layoffs.
• Job Openings: The July JOLTS report indicates that for the first time since April 2021, the number of unemployed has exceeded the number of job openings, suggesting that the U.S. labor market has shifted to a demand-constrained state, which is seen as a precursor to economic recession.
• Consumer Confidence: A report from the World Federation of Large Enterprises shows that the proportion of consumers who believe "job opportunities are plentiful" has decreased, while the proportion who believe "jobs are hard to find" has increased, with the labor market disparity index dropping to its lowest level since February 2021

Potential Major Revisions

In addition to the monthly data, a larger potential shock comes from next week's employment data benchmark revision. The U.S. Bureau of Labor Statistics will release the preliminary benchmark revision values for 2025 on September 9. The market expects this revision could lower the total number of jobs as of March 2025 by 500,000 to 1 million, implying that the average monthly job gains over the past year may have been overestimated by 40,000 to 85,000.

It is noteworthy that the employment level in March 2024 was revised down by 598,000 in the final revision, and this revision was considered one of the most important catalysts prompting the Federal Reserve to make a "significant" 25 basis point rate cut at that time. Therefore, even if the August report performs modestly, next week's benchmark revision itself could become a strong reason for the Federal Reserve to take decisive action.

How High is the 50 Basis Point Threshold?

As the expectation for a 25 basis point rate cut in September is fully priced in by the market, all eyes are on the possibility of a 50 basis point cut. According to Standard Chartered Bank's analysis, to put a 50 basis point rate cut "on the table," investors may need to see non-farm payrolls below 40,000, with the unemployment rate reaching or exceeding 4.4%.

J.P. Morgan's market intelligence department pointed out that a weaker-than-expected report would increase the market's calls for a 50 basis point rate cut. However, the real risk lies in unexpectedly strong data—such as job gains reaching 175,000 to 200,000—which could force the Federal Reserve to pause its rate-cutting pace. The bank believes that next week's CPI data is more critical than this non-farm report, as a hot inflation figure combined with a strong employment report is the most likely combination to prompt the Federal Reserve to pause its actions.

As previously mentioned, Federal Reserve Governor and dovish dissenter Waller recently reiterated calls for rate cuts, stating that the Federal Reserve should start cutting rates this month and make multiple cuts in the coming months, but he is open to the specific pace of cuts, believing it will depend on future economic data. Therefore, tonight's report will not only affect the September decision but also shape market expectations for future rate-cutting paths.

How is the Market Pricing?

Options market data shows that the implied volatility expects a single-day swing of about 0.70% for the S&P 500 index after the report is released, which is a relatively moderate level. According to analysis from J.P. Morgan's market intelligence department, the market's reaction to the employment report results is positively skewed, indicating that investors generally believe this data is unlikely to affect the Federal Reserve's rate-cut decision in September.

The department provided a detailed scenario analysis:

• Job gains above 110,000: S&P 500 index rises 1% to falls 1.5% (5% probability)
• Job gains between 85,000 and 110,000: S&P 500 index rises 0.5% to 1.25% (25% probability)
• New jobs between 65,000 and 85,000: S&P 500 index rises by 0.5% to 1% (probability 40%)
• New jobs between 40,000 and 65,000: S&P 500 index rises by 0.25% to 0.5% (probability 25%)
• New jobs below 40,000: S&P 500 index falls by 0.25% to 0.75% (probability 5%)

Goldman Sachs Trading Desk Consensus: "Just Right" is the Best Outcome

Several analysts from Goldman Sachs' trading desk believe that a "neither good nor bad" or slightly weak data is the most favorable outcome for risk assets.

Vickie Chang from Goldman Sachs Global Macro Research stated that her team predicts new jobs at 60,000, with the unemployment rate slightly rising to 4.3%, which falls within the range of benign outcomes that neither challenge the current market's growth pricing nor undermine expectations for a rate cut in September. She warned that if the unemployment rate sharply rises to 4.4% or higher, the market will begin to worry about a recession, thereby putting pressure on the stock market. Conversely, a truly strong report would reverse the market's dovish view on the Federal Reserve, which would be unfavorable for risk assets.

U.S. portfolio strategist Ryan Hammond added that investors seem to be "looking through" the recent economic data weakness, instead focusing on the robust economic and earnings growth outlook for 2026 and expectations for Federal Reserve easing. He believes that a report that meets or slightly exceeds expectations will validate this view, but the upside potential for the S&P 500 index will be moderate.

Goldman Sachs ETF/index basket volatility trader Shawn Tuteja noted that the backdrop for this non-farm payroll report is "more ambiguous" than in recent months. On one hand, the upcoming rate cut cycle makes it difficult for the market to trade the theme of "policy missteps" when data is slightly weak; on the other hand, the recent pullback in the artificial intelligence sector and sector rotation have forced some clients to reduce risk exposure and become more defensive.

Goldman Sachs index volatility trader Joe Clyne stated that considering the skew is close to high and volatility has moved away from lows, the October S&P 500 put spread options are the "optimal hedge" against weak data