Since the surprisingly weak non-farm payrolls data released in August, traders have really only had one question on their minds. Will we see another soft set of job figures? The fact that we have a Fed meeting in a couple of weeks and so the start of policy easing by the world’s most important central bank simply adds extra weight to this Friday’s US employment data.

Of course, one data point does not make a trend, probably not even two. But Fed Chair Powell has stressed the FOMC is now focused on the employment picture more than the inflation part of their mandate. Indeed, Powell said recently that “we don’t seek or welcome further cooling in labour market conditions”. Markets are braced for at least a 25bp rate cut in a few weeks’ time but another soft report could see them wanting more.

Hurricane Beryl impact?

Consensus expects job gains to rebound with a headline of 165,000 in August, which is marginally below the three-month average of 170,000. As always, watch out for any major revisions. The unemployment rate was perhaps even more shocking last time around, which means this figure could grab the limelight. It is forecast to drop one-tenth to 4.2%, which is still above the FOMC’s June projection of 4% at the end of the year.  That prior print had triggered the “Sahm rule” which says there will be a recession once the u/e rate rises 0.5% above its low for the previous 12 months.

Many economists believe that the July employment report was skewed by Hurricane Beryl and underlying demand remains relatively healthy. On the former, there are plenty of signs that the weather left an imprint on previous data. For example, the number of workers who were absent from work due to weather and the number of workers who were temporarily laid off surged in July. Some reckon the weather conditions subtracted around 30k from the July headline and is likely to be reversed. Similarly, initial claims spiked as Hurricane Beryl made landfall, but they have since normalised to pre-pandemic norms. Additionally, a number of other economic indicators, such as housing starts and industrial production, were also affected by the hurricane.

However, the below-trend July gain may have been influenced by a few service industries which are not weather related but have raised questions about the July release. The recent divergence between weak household employment and better non-farm payrolls is still baffling and a source of concern. Furthermore, hiring activity has generally weakened, with the ISM and S&P Global indices at pandemic lows and weak service sector data.

Market reaction

Fed officials are advocating for a rate cut but the size and pace of policy easing remains uncertain. Gradual moves seem to be the way forward ie 25bps moves, as anything larger is generally reserved for extraordinary circumstances, after a shock and very likely imminent recession.

Money markets are pricing in a 58% chance of a quarter point move, with a 42% possibility of a 50bps rate cut. There are around 103bps of easing priced in for the next three meetings this year. If we get a sub 100k on payrolls and the unemployment rate ticks up to 4.4% or higher, then 50bps looks more likely given Powell’s recent comments. This would likely hurt USD and stocks, as it could rekindle recession fears.

However, if the headline prints around the 160k mark and unemployment rate stays at 4.3% or dips to 4.2%, as consensus is currently predicting, it seems very likely it will be a 25bp move. Stocks could breathe a sigh of relief and the dollar too, in the short term at least.