Original Title: US August Nonfarm Payrolls Preview: How Much Will It Impact the Fed's September Rate Hike Decision?
Original Author: Yulia Zeng, TradingKey

Editor's Note: The US Bureau of Labor Statistics will release the August Nonfarm Payrolls report on September 4, marking the final comprehensive employment report before the Fed's September 15-16 policy meeting. July's Nonfarm Payrolls unexpectedly decreased by 23,000, with May and June data revised down by a combined 103,000. The latest ADP report showed a meager addition of 38,000 private-sector jobs in August, further signaling a slowdown in hiring.

However, the policy backdrop for this jobs report differs from the traditional "bad news is good news" narrative. Inflation remains above the Fed's 2% long-term target, and new upside risks have emerged from energy prices and supply chain pressures. In this context, a weakening labor market may not necessarily lead to easing but could instead trap the Fed in a dilemma of slowing growth and sticky inflation.

TradingKey's Yulia Zeng believes that what the market truly hopes to see is not a deteriorating job market but a moderated cooling in hiring, a stable unemployment rate, and a gradual easing of wage pressures. Strong data may reinforce rate hike expectations, while weak data could trigger recession trades. A "controlled cooling" scenario between the two extremes may provide a relatively favorable environment for risk assets.

Therefore, the August Nonfarm Payrolls resemble a piece of the puzzle for the September policy outlook rather than a sole determinant of a rate hike. Jobs data will influence the Fed's sense of urgency for action, with subsequent inflation figures potentially setting the policy direction. Market participants need to assess whether labor demand is slowly cooling off or heading towards a more pronounced economic contraction.

Below is the translated excerpt of the original article:

The US Bureau of Labor Statistics will release the August Nonfarm Payrolls report on September 4 at 8:30 am ET. As per the official schedule, this will be the final comprehensive employment report before the Fed's September 15-16 policy meeting and will be a key gauge of whether the labor market can withstand further rate hikes.

Forecasts from different institutions show slight variances. The article cited market expectations of adding around 58,000 jobs with the unemployment rate holding at 4.1%; Reuters' latest survey median forecast is around 56,000. Regardless of which estimate is adopted, the market anticipates only a modest recovery in August employment, significantly slower than the pace of expansion in recent years.

The baseline is also weak. In July, the US nonfarm payrolls unexpectedly decreased by 23,000, far below the market's previous expectations of adding 80,000 jobs; the May and June data were also revised downward by a total of 103,000. Although the unemployment rate dropped from 4.2% to 4.1%, part of the reason is the decrease in labor force participation, which cannot be simply understood as an improvement in the job market.

Prior to the nonfarm release, the ADP Employment Report further reinforced the impression of a hiring slowdown. In August, the US private sector added 38,000 jobs, below market expectations and the lowest increase in seven months. However, ADP only covers the private sector, uses a different statistical methodology from the official nonfarm payroll, and is more suitable as a reference for labor market trends, not directly equivalent to nonfarm forecasts.

Adding 50-60k jobs may be the most acceptable outcome for the market

If around 50,000 to 60,000 jobs are added in August, it superficially indicates that the labor market continues to cool, but for the Federal Reserve, this outcome may not necessarily be enough to support an immediate policy shift towards accommodation.

On the one hand, if employment shows only a slight rebound after the negative growth in July, it indicates that business hiring intentions are indeed weakening. On the other hand, job vacancies and layoff data have not deteriorated synchronously, and the labor market is closer to a "low hiring, low firing" state: companies are not eager to expand their workforce and there are no widespread layoffs.

This distinction is crucial. A hiring slowdown may imply a cooling of economic demand; it is only when both hiring and layoffs worsen simultaneously that the signal of rapid recession risk escalation is closer.

Therefore, what the market hopes to see is a gradual slowdown in employment, rather than simply pursuing worse data. If job additions are significantly higher than expected, investors may reconsider the necessity of further Fed rate hikes, short-term US bond yields and the US dollar may find support, while high-valuation tech stocks may come under pressure.

If employment shows negative growth again, the market reaction may not be positive either. Overly weak data may shift the focus of trading from "Can the Fed pause rate hikes" to "Is the US economy accelerating its downturn," thereby fueling recession trades.

In the author's opinion, adding around 50,000 to 60,000 jobs and maintaining a stable unemployment rate may be a relatively moderate combination: it can reduce the Fed's concerns about the labor market overheating and not overly amplify economic recession expectations.

The Fed's focus has now shifted back to inflation

The reason why employment data alone cannot determine the September policy is that the main pressure the Fed currently faces is still from inflation.

Fed Chair Kevin Warsh stated in his Jackson Hole speech that policymakers need to assess whether the core inflation is rising, falling, or stagnant, while also monitoring the rate of change. He pointed out that although several inflation indicators have significantly retreated from their 2022 highs, the extent of improvement over the past two years has been limited.

This statement did not directly commit to a rate hike in September, but it sent a rather clear signal: as long as core inflation lacks evidence of sustained decline, the Federal Reserve will not easily abandon its tightening options due to a single month of weak job growth.

The July interest rate meeting already demonstrated this policy inclination. At that time, the Federal Reserve kept rates unchanged, but Beth Hammack, Neel Kashkari, and Lorie Logan dissented, advocating for a 25-basis-point hike. The three members simultaneously supported a rate increase, indicating that a clearer hawkish faction has emerged within the Federal Open Market Committee.

The meeting minutes further revealed that many participants believed that if inflation does not continue to decline, subsequent policy tightening may be necessary; some officials also assessed that current financial conditions may not be sufficient to drive inflation back to 2%.

In other words, even if August job growth modestly cools off, as long as wage growth remains high and inflation pressures persist, hawkish officials still have reason to support a rate hike.

The Urgency of Nonfarm Payrolls and the Policy Direction Determined by Inflation Data

With energy prices rising, supply chain pressures increasing, and Federal Reserve officials sending hawkish signals, the pricing of a September rate hike in the interest rate market has recently heated up significantly.

This probability exhibits strong intraday volatility. The original text stated that the pricing of a 25-basis-point rate hike in September rose to as high as 68% to 70% at one point; after weaker-than-expected ADP data was released, some real-time gauges retreated to around 61% to 64%. Therefore, a more accurate statement would be: the market is currently leaning towards a rate hike, but a stable consensus has not yet been reached.

The August nonfarm payrolls report will first test this expectation.

If new job additions are significantly higher than expected, while average hourly earnings maintain rapid growth, the market may further increase the probability of a September rate hike. Short-term Treasury yields and the U.S. dollar may find support, while rate-sensitive growth stocks may face valuation pressure.

If job growth is close to zero or turns negative again, and wage growth simultaneously slows down, the necessity for the Federal Reserve to hike rates immediately in September will decrease. The market may then reconsider betting on a hold-steady policy, waiting for more data confirmation.

However, weak job numbers alone are still not enough to alter the policy path. The Federal Reserve bears the dual mandate of full employment and price stability, and when employment and inflation send conflicting signals, policy decisions depend on which risk is more pressing.

Therefore, the nonfarm payrolls report cannot only focus on the number of new jobs. The unemployment rate, labor force participation rate, average hourly earnings, weekly hours worked, and revisions to previous figures are equally important. Weak job additions but high wage growth may still be interpreted as limited labor supply rather than a significant demand downturn; only when employment and wages cool off simultaneously can the rationale for a rate hike be significantly weakened.

Next Up: Watching Whether Wages and CPI Will Cool in Sync

Following the August nonfarm payroll report, market attention will quickly shift to the August Consumer Price Index (CPI) to be released on September 11, followed by the Federal Reserve's interest rate meeting on September 15 to 16.

The key to validating the logic of this article is not whether individual data points come in below expectations, but whether employment and inflation can move in a consistent direction:

If employment shows moderate growth, wages slow down, and CPI cools off, the urgency for a September Fed rate hike will significantly diminish;

If employment is stronger than expected, and both wages and CPI remain elevated, the case for a rate hike will be strengthened;

If employment significantly deteriorates but inflation remains high, the Fed will face the most challenging policy mix, leading to a potential increase in market volatility.

Therefore, the August nonfarm payroll report is more likely to alter the market's pricing of a rate hike probability than to single-handedly determine the final outcome. What will truly impact the September policy decision is the evidence chain formed by employment, wages, and inflation data.

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