Tonight's U.S. non-farm payrolls exam, will the "weak July" curse repeat? The previous three years have all fallen short of expectations

Author: Zhang Yaqi
The U.S. non-farm payroll report for July will be released tonight Beijing time. The market consensus expects an increase of about 80,000 jobs, but multiple leading indicators are sending mixed signals, with some institutions providing forecasts far below consensus. Whether the "weak July" curse can be broken has become the biggest suspense in the current market.

The expected range in the market is unusually wide, ranging from a high of 157,000 to a low of 40,000. Goldman Sachs predicts an increase of 75,000 jobs, slightly below consensus; Vanguard gives a very low forecast of only 18,000 jobs, believing that this spring's employment data was artificially inflated due to weather, World Cup hiring, and local governments' early recruitment, facing significant downward pressure in July. Meanwhile, ADP's private sector employment data showed an increase of only 44,000, significantly below expectations, further exacerbating concerns about downside risks.

For the Federal Reserve, the current policy focus has clearly shifted to inflation rather than employment. Several officials have recently described the labor market as "stable," and a strong employment report would reinforce expectations of "maintaining high interest rates for a longer time," thereby putting pressure on interest rate-sensitive assets; conversely, if the data is weak, it may push market pricing towards a moderate rate cut.

"Weak July" Curse: Three Years of Continuous Underperformance

One of the most concerning backgrounds for this report is the pattern of disappointing July employment data in recent years.

According to a Goldman Sachs research report, over the past three years, the increase in U.S. non-farm employment in July has averaged 66,000 lower than the three-month average at that time and 35,000 lower than the market consensus. These weaker-than-expected figures have also been accompanied by significant downward revisions to the data from the previous two months, with an average downward revision of 112,000.

Goldman Sachs economists Ronnie Walker and Jessica Rindels listed this pattern as one of the core bases for downside risks in their report. Several alternative employment growth indicators they tracked averaged 65,000 in July, lower than June's 79,000.

Additionally, Barclays analysts pointed out that the June employment data itself has a significant risk of revision—this data is based on only about half of the usual survey response rate, and the U.S. Bureau of Labor Statistics (BLS) relies heavily on model estimates rather than actual reported data. Barclays expects this revision to be substantial, but the direction remains unclear.

World Cup Effect and Low Layoff Levels as Support

Not all signals point downward. Several data points provide temporary support for the employment market.

The World Cup hiring effect is an important positive factor in Goldman Sachs' forecast. Data from Homebase shows that during the survey reference week from June to July, employment growth in World Cup host cities was significantly faster than in other regions. Goldman estimates this effect could contribute about 10,000 jobs to July's non-farm payrolls, mainly concentrated in leisure and hospitality, professional business services, and trade and transportation sectors. However, the same data also shows that this effect began to wane immediately after the July reference period ended.

Layoff data also presents positive signals. The number of initial unemployment claims in July fell to 210,000 during the BLS survey window, down from 224,000 in June; during the week coinciding with the survey window, it dropped to as low as 188,000, the lowest level since September 1969. The number of layoffs announced by companies in the Challenger, Gray & Christmas report decreased by 12,000 month-on-month to 33,000 in July, the lowest since July 2024.

Government hiring also shows signs of recovery. After a continuous contraction of about a year and a half, government employment has averaged an increase of 12,500 jobs per month over the past four months, and government job vacancies have recently rebounded.

Labor Participation Rate and Unemployment Rate: Potential Concerns

One of the cores of the employment report is the trend of the unemployment rate and the changes in the labor participation rate behind it.

Goldman Sachs expects the unemployment rate in July to slightly rise from 4.2% to 4.3%, higher than the consensus expectation of remaining flat. Goldman believes this is partly due to a reversal of the significant decline in the labor participation rate in June—June's participation rate plummeted to 61.5%, the lowest since March 2021, and the lowest level outside the COVID-19 pandemic since June 1976; among them, the participation rate for the core working age group (25 to 54 years) recorded the largest single-month decline in history outside of April 2020.

Economists at Vanguard expect that as these workers exit the labor market and re-enter the job search, but at a slower pace than their willingness to return, the unemployment rate will face upward pressure, with a year-end unemployment rate forecast of 4.6%.

Citi economist Veronica Clark pointed out that the employment market is currently in a "low hiring, low layoffs" equilibrium state, which is particularly unfavorable for new job seekers. She expects the unemployment rate to exceed 4.5% within a few months, at which point the market focus will shift back to expectations of rate cuts, with Citi's baseline scenario being a resumption of rate cuts in the fourth quarter of this year.

Federal Reserve Position: Inflation First, Employment Stability Second

The guidance significance of this non-farm data for monetary policy will mainly reflect whether to strengthen or loosen the baseline expectation of "maintaining high interest rates for a longer time."

Federal Reserve Chair Waller described the labor market as "robust and stable," Logan called it "robust and slightly improved," Schmid considered it "generally balanced," Paulson and Hammack stated it has stabilized, and Barkin was the most cautious, saying the market "does not feel tense." Overall, officials view inflation as a more urgent policy challenge than employment.

It is worth noting that the Oxford Economics Institute pointed out that even if the month-on-month increase in hourly wages in July reaches 0.4%, the annual rate is only 3.6%, still consistent with the Federal Reserve's 2% inflation target, and wage pressure is currently not seen as a significant inflation risk. According to Bloomberg, analysts believe a strong employment report could push up real yields, especially given Waller's previous statement that "the market has, to some extent, already completed some tightening work for the Federal Reserve."

Good News Becomes Bad News?

J.P. Morgan's market intelligence department believes this non-farm data will trade under the logic of "good news is bad news"—a strong employment figure will reinforce pricing for "high rates maintained longer," pushing up interest rates and suppressing interest rate-sensitive sectors; if the data is moderately weak, it may lead to a decline in yields, with market pricing slightly moving towards a dovish direction, and the equity market may respond positively.

J.P. Morgan's detailed scenario analysis is as follows:

• If non-farm exceeds 150,000, the S&P 500 index is expected to drop by 50 to 175 basis points, with a probability of 10%;
• If non-farm is between 100,000 and 150,000, the index may drop by 50 basis points to rise by 25 basis points, with a probability of 25%;
• If non-farm is between 60,000 and 100,000, the index may drop by 25 basis points to rise by 50 basis points, with a probability of 30%;
• If non-farm is between 20,000 and 60,000, the index may rise by 25 to 75 basis points, with a probability of 25%;
• If non-farm is below 20,000, the index may drop by 125 basis points to rise by 50 basis points, with a probability of 10%.

The options market's pricing for this non-farm data is relatively restrained, with contracts expiring on August 7 implying a volatility of only about 0.7%, reflecting that the market has partially digested uncertainties against the backdrop of easing geopolitical tensions. As of the midday of August 6, the yield on the 2-year U.S. Treasury bond fell from a recent high of 4.35% to about 4.24%.