Friday’s U.S. payroll report is being touted as the most important figure of the year. It is expected to shape the narrative—and possibly the pace—of the Federal Reserve's anticipated rate-cutting cycle.
A poll of economists predicted a headline payroll figure of 165,000 jobs added in August, up from the surprisingly weak 114,000 in July (when analysts had expected 175,000). Experts attributed the lower-than-forecast July figure to weather-related disruptions, noting that the reporting period coincided with Hurricane Beryl, which affected various industries across Texas and neighbouring states.
Deutsche Bank analysts point out that “although last month’s jobs report was underwhelming, much of the data since then has looked more positive.” They cited falling weekly initial jobless claims, more robust retail sales, and upward revisions to Q2 GDP growth to an annualized pace of 3.0%, which they described as “inconsistent with a recession.”
However, August's ADP print was disappointing, showing only 99,000 jobs added versus the 145,000 forecast—the lowest level since January 2021. July’s ADP number was also revised to 111,000 from an initial 122,000.
What the banks say
Citi analysts expect a modestly stronger 125,000 increase in nonfarm payrolls in August. “In our view, the Fed would cut 50bp with 4.3% unemployment and sub-175k payrolls growth. If the unemployment rate falls back to 4.2%, payroll growth would need to be below 125,000 to convince Fed officials to cut 50bps. Chair Jerome Powell sounded not only open to a larger-sized cut but also to laying the groundwork for one at Jackson Hole by saying there is “ample room” to reduce policy rates."
Barclays said it expected nonfarm employment to have risen by 175,000 (current consensus: 165,000) in August, alongside a decline in the unemployment rate to 4.2% (-0.1pp). “We also forecast a rebound in the workweek to 34.3 hours and an acceleration in average hourly earnings to 0.3% m/m, boosting incomes.”
SocGen anticipates a rebound in nonfarm payrolls following a soft reading in July. “The below-trend July gain was influenced by a few services industries, including information services, business services, and private education. These factors, which are not expected to be weather-related, have raised questions following the July employment release. Without repeated losses in these categories, nonfarm job gains are projected to approach 150,000 jobs. Trend increases could result in a nonfarm payroll increase of 170,000 jobs, and an offset to earlier weakness could lead to larger gains.”
HSBC forecasts a payrolls rise of 160,000. “We expect average hourly earnings (AHE) to increase 0.3% m/m, with the y/y rate rising to 3.7% from 3.6%. After increasing in each of the past four months through July, the unemployment rate is likely to be in sharp focus. We expect the unemployment rate fell back to 4.2% in August from 4.3% in July, with the labour force participation rate holding steady at 62.7%.”
Reaction Function
With inflation concerns on the back burner, Friday’s jobs report will be crucial for investors. The market reaction to recent JOLTS data, which showed job openings falling to 7.673 million versus a forecast of 8.1 million, suggests the employment number could trigger significant swings.
Commenting on the July job opening report, JP Morgan’s Abiel Reinhart said it pointed to a further cooling in the labour market as the number of job openings continued to slide. The ratio of openings to unemployed started to dip below the pre-pandemic level, falling to its lowest reading since 2018. “This should further focus the Fed’s attention on labour market concerns at the next FOMC meeting.”
Citi analysts speculated that the Fed may kick off its rate-cut cycle at the September FOMC meeting, but the size of the cut—either 50 basis points or 25—will depend on Friday's report. They estimate that a 50bp cut would follow if the unemployment rate is 4.3% and payroll growth falls below 175,000. If unemployment drops to 4.2%, payroll growth would need under 125,000 for the Fed to consider a 50bp cut.
Barclays, meanwhile, argued that an outcome in line with their estimates would lead to a 25bp cut in September. They continue to expect three 25bp cuts this year, assuming inflation remains subdued and the labour market near full employment, though they acknowledged risks if the unemployment rate continues to climb.
Bank Estimates For August Payrolls
Click on image to enlarge
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- Consensus forecasts expect a 165,000 job increase in August
- Rebound anticipated after weather-related dip in July
- Fed officials prioritising jobs data over inflation
- Higher likelihood of a 50bps rate cut if figures disappoint
By Harry Daniels
LiveSquawk News
@HarryDaniels71
05 September 2024 | 17:30 GMT
Friday’s U.S. payroll report is being touted as the most important figure of the year. It is expected to shape the narrative—and possibly the pace—of the Federal Reserve's anticipated rate-cutting cycle.
A poll of economists predicted a headline payroll figure of 165,000 jobs added in August, up from the surprisingly weak 114,000 in July (when analysts had expected 175,000). Experts attributed the lower-than-forecast July figure to weather-related disruptions, noting that the reporting period coincided with Hurricane Beryl, which affected various industries across Texas and neighbouring states.
Deutsche Bank analysts point out that “although last month’s jobs report was underwhelming, much of the data since then has looked more positive.” They cited falling weekly initial jobless claims, more robust retail sales, and upward revisions to Q2 GDP growth to an annualized pace of 3.0%, which they described as “inconsistent with a recession.”
However, August's ADP print was disappointing, showing only 99,000 jobs added versus the 145,000 forecast—the lowest level since January 2021. July’s ADP number was also revised to 111,000 from an initial 122,000.
Citi analysts expect a modestly stronger 125,000 increase in nonfarm payrolls in August. “In our view, the Fed would cut 50bp with 4.3% unemployment and sub-175k payrolls growth. If the unemployment rate falls back to 4.2%, payroll growth would need to be below 125,000 to convince Fed officials to cut 50bps. Chair Jerome Powell sounded not only open to a larger-sized cut but also to laying the groundwork for one at Jackson Hole by saying there is “ample room” to reduce policy rates."
Barclays said it expected nonfarm employment to have risen by 175,000 (current consensus: 165,000) in August, alongside a decline in the unemployment rate to 4.2% (-0.1pp). “We also forecast a rebound in the workweek to 34.3 hours and an acceleration in average hourly earnings to 0.3% m/m, boosting incomes.”
SocGen anticipates a rebound in nonfarm payrolls following a soft reading in July. “The below-trend July gain was influenced by a few services industries, including information services, business services, and private education. These factors, which are not expected to be weather-related, have raised questions following the July employment release. Without repeated losses in these categories, nonfarm job gains are projected to approach 150,000 jobs. Trend increases could result in a nonfarm payroll increase of 170,000 jobs, and an offset to earlier weakness could lead to larger gains.”
HSBC forecasts a payrolls rise of 160,000. “We expect average hourly earnings (AHE) to increase 0.3% m/m, with the y/y rate rising to 3.7% from 3.6%. After increasing in each of the past four months through July, the unemployment rate is likely to be in sharp focus. We expect the unemployment rate fell back to 4.2% in August from 4.3% in July, with the labour force participation rate holding steady at 62.7%.”
With inflation concerns on the back burner, Friday’s jobs report will be crucial for investors. The market reaction to recent JOLTS data, which showed job openings falling to 7.673 million versus a forecast of 8.1 million, suggests the employment number could trigger significant swings.
Commenting on the July job opening report, JP Morgan’s Abiel Reinhart said it pointed to a further cooling in the labour market as the number of job openings continued to slide. The ratio of openings to unemployed started to dip below the pre-pandemic level, falling to its lowest reading since 2018. “This should further focus the Fed’s attention on labour market concerns at the next FOMC meeting.”
Citi analysts speculated that the Fed may kick off its rate-cut cycle at the September FOMC meeting, but the size of the cut—either 50 basis points or 25—will depend on Friday's report. They estimate that a 50bp cut would follow if the unemployment rate is 4.3% and payroll growth falls below 175,000. If unemployment drops to 4.2%, payroll growth would need under 125,000 for the Fed to consider a 50bp cut.
Barclays, meanwhile, argued that an outcome in line with their estimates would lead to a 25bp cut in September. They continue to expect three 25bp cuts this year, assuming inflation remains subdued and the labour market near full employment, though they acknowledged risks if the unemployment rate continues to climb.