Once the non-farm payrolls data deviates from expectations, both Wall Street and the Federal Reserve will face enormous pressure for repricing.

At 8:30 PM Beijing time on Friday, the U.S. Bureau of Labor Statistics will release the August non-farm employment report. Economists widely predict that U.S. employers' hiring intentions remain insufficient, with the unemployment rate potentially rising to its highest level in nearly four years, further highlighting the labor market downturn.

According to market expectations, August may see 75,000 new non-farm jobs added, with the unemployment rate expected at 4.3%. If these expectations are met, this would mark the fourth consecutive month of job gains below 100,000, representing the weakest consecutive performance since the pandemic outbreak in 2020.

Tonight's Non-Farm Data Is Crucial!

The importance of this report cannot be overstated. It not only relates to judgments about the overall direction of the U.S. economy but will also directly influence the Federal Reserve's rate cut decision at the September meeting. The market widely expects the Fed to cut rates by 25 basis points in September, but if employment rebounds or inflation worsens, this expectation could be shattered.

Morgan Stanley Chief Economist Michael T. Gapen noted: "If August adds 225,000 jobs, it might alleviate the Fed's concerns about the labor market, thereby pushing policymakers to maintain higher interest rate levels." However, he also cautioned that such growth would be the fastest since December 2024.

Morgan Stanley revised its forecast at the end of August, stating it expects the Fed to cut rates twice this year and reaffirming that September will likely see a rate cut, but also warning that strong employment data or tariff-driven significant inflation increases could delay this month's rate cut.

If non-farm data falls short of expectations, the market may further increase rate cut bets, even re-triggering expectations of "one or multiple 50 basis point cuts." Morgan Stanley analysts noted: "If job additions decline significantly, combined with market bets on preemptive rate cuts, it could force the Fed to act more quickly."

The firm believes the Fed will continue its dovish path next year, expecting quarterly rate cuts in 2026, with the terminal rate potentially falling to 2.75% to 3.00%.

Previous Data Revisions Will Be a Major Focus

Another major highlight of this non-farm report is whether previous figures will be revised downward again. July's non-farm data was unexpectedly weak, while May and June data underwent substantial revisions, which greatly angered President Trump, leading to the dismissal of the Bureau of Labor Statistics commissioner. He claimed the data was "manipulated" to embarrass him.

AJ Bell investment experts Russ Mould, Danny Hewson, and Dan Coatsworth commented: "Some believe that July's non-farm data and previous revisions indicate that the U.S. economy has begun to soften. The market will initially compare August data with July's initial figures, but attention will quickly shift to further revisions of June and July data."

Additionally, next Tuesday (September 9), the U.S. Department of Labor will release the annual benchmark revision for non-farm data. Goldman Sachs and Standard Chartered warn that U.S. non-farm employment data may be significantly overestimated, with this revision potentially reducing job counts by 550,000 to 800,000 positions in one adjustment.

The two institutions point out that data overestimation mainly stems from distortions in the birth-death model and overestimation of the labor force population due to reduced illegal immigration. "This revision will have a significant impact on market confidence and policy outlook, potentially even prompting the Fed to choose another 50 basis point substantial rate cut," analysts stated.

Clear Signs of Labor Market Slowdown

The U.S. labor market currently shows signs of fatigue. Fed officials are caught in a dual-mandate dilemma between reducing inflation and maintaining employment. Chairman Powell hinted at the Jackson Hole meeting that the labor market is more concerning than at the beginning of the year.

Data released this week indicates that the labor market is not only cooling but almost stagnating: hiring has stalled, employee mobility lacks, and layoffs remain at low levels. As Indeed economist Allison Shrivastava pointed out: "July JOLTS data serves as a good reminder of the importance of labor market fluidity: it can drive wage increases, create opportunities for more groups to enter the labor market, and promote innovation. The past few months have shown exactly the opposite."

Structurally, employment growth increasingly relies on a few industries such as healthcare, leisure, and hospitality, but even these sectors show signs of slowing job creation.

Gold Rally or Dollar Comeback?

This week, gold prices repeatedly hit new highs driven by warming rate cut expectations, tariff uncertainties, concerns about Fed independence, and geopolitical risks, making the market more sensitive to non-farm data than ever.

Monex Europe analysts wrote in their report: "We believe August data will show the labor market remains relatively solid, with a higher possibility of hot data." They emphasized that if non-farm data exceeds expectations, the dollar could gain support, market focus would return to inflation risks, and the Fed might even be unable to implement rate cuts throughout the year, thereby driving dollar strength.

Conversely, weak non-farm data will continue to benefit gold. Mitsubishi UFJ analyst Lee Hardman stated: "If Friday's U.S. non-farm employment data is much weaker than expected, the dollar could decline further. Another disappointing employment report would reinforce market expectations, prompting the Fed to resume rate cuts at the September meeting, possibly even cutting rates by 50 basis points at once."

He added that unless data significantly exceeds expectations, it would be difficult to dispel market judgments about Fed rate cuts in September.

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