Anti-“Goldilocks”! Tonight’s Nonfarm Payrolls: Good news and bad news are both bad news for US stocks

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The US nonfarm payroll data for May to be released tonight will plunge the market into a rare "anti-Goldilocks" dilemma: regardless of whether the data is strong or weak, it's hard to see it as a net positive for the stock market. Investors face the most agonizing direction choices on a night historically priced with the lowest implied volatility for nonfarm payrolls.

The market consensus expects about 88,000 new nonfarm jobs in May, a slowdown from April's 115,000. However, institutional forecasts vary sharply—Goldman Sachs projects only 60,000, far below consensus; Bank of America forecasts 95,000 and sees more upside risk. ADP data shows 122,000 private sector jobs were added in May, the strongest since January 2025, but analysts warn the average deviation between ADP estimates and official Bureau of Labor Statistics (BLS) numbers is as high as 83,000, limiting their reference value.

J.P. Morgan's market intelligence team points out tonight's data will create a "damned if you do, damned if you don't" dilemma: if the data is weak, stagflation fears will return, posing clear negative risk signals; if the data is strong, inflation expectations will push bond yields and volatility higher, also unfavorable for stocks. According to J.P. Morgan's scenario analysis, the interval covering potential downside risks accounts for about 60% probability distribution. Meanwhile, the money market currently prices in a 56% chance of a Fed rate hike this year, so strong employment data could trigger more aggressive hike expectations, further shrinking stock market upside.

The deeper background to this dilemma is that the Fed's policy balance now clearly tilts toward the inflation side, with greater tolerance of employment weakness than before; since the outbreak of the Iran war, the correlation between the US dollar and employment data has sharply weakened, now following oil price swings more. S&P 500 straddle options are currently priced at about 47 basis points, the lowest since December 2024, reflecting market restraint for tonight's implied volatility.

Institutional Forecast Divergence at Recent Highs—Goldman vs. BofA

The market consensus expects May nonfarm job gains of 88,000, slightly higher than the three-month average of 48,000 and twelve-month average of 21,000. The unemployment rate is expected to hold steady at 4.3%, and average hourly earnings growth to slow from 3.6% to 3.4%.

Goldman Sachs economists Ronnie Walker and Jessica Rindels set their forecast at 60,000, below the 85,000 market consensus but slightly above the three-month average. Goldman cited negative factors including: its tracked big-data alternative employment indicator averaging 69,000 new jobs in May, below April's 90,000; continued federal hiring freeze expected to reduce government jobs by a net 5,000 (10,000 federal jobs lost, 5,000 added at state/local); strikes to drag overall job gains by about 2,600. As a positive, initial jobless claims averaged 203,000 during the survey week, a two-year low.

Bank of America economist Shruti Mishra takes a more optimistic stance, predicting 95,000 new jobs, above consensus. Upside risks include persistent low jobless claims, ADP data beating expectations, and extra hiring activity ahead of the World Cup. BofA notes if their forecast is correct, average monthly private sector job gain in the first five months of 2024 would reach 89,000—the strongest five-month pace in 2024.

Polymarket forecast data shows the most likely range is 100,000–150,000 jobs (43% probability); next is 50,000–100,000 (38%).

Bull-Bear Signals Contradict, Jobless Claims vs. PMI Surveys Diverge

Core support for a strong report centers on low layoff data. Initial jobless claims during May's survey week averaged 210,000, roughly flat with April's 215,000 and well below historical warning levels; April JOLTS layoff rate dipped slightly to 1.1%, at historic lows.

However, employer survey data offers clear warning signs. ISM Manufacturing PMI employment subindex rose 2.2 points to 48.6, but still in contraction territory; about half of surveyed firms keep headcount flat as standard. ISM Services PMI employment subindex remained in contraction for the third straight month, dropping further to 47.9 in May, with frequent mentions of hiring freezes or unfilled vacancies. The Fed's latest Beige Book shows jobs in 11 districts changed little, with overall "double low"—low hiring, low layoffs—with workers increasingly reluctant to change jobs amid economic uncertainty.

Notably, Pantheon Macroeconomics maintains a low forecast of 50,000 jobs and expects the unemployment rate to rise to 4.4%, citing superior predictive value of employer survey over big data indicators: The agency points out that in the past four years, Conference Board job availability difference, NFIB hiring intention index, and regional Fed employment indexes have all reliably predicted nonfarm payrolls, and these three indicators now show obvious downside signals, especially as NFIB hiring plans have sharply fallen from January peak to mid-2025 lows.

Unemployment Rate Uncertainty: Holds at 4.3% or Rises to 4.4%?

There is considerable uncertainty about the unemployment rate's direction. In April, the unrounded unemployment rate was 4.337%, just a step from rounding up to 4.4%. The Chicago Fed's forward labor market indicator predicts May's rate at 4.32%, but also notes the probabilities for rounding up to 4.4%, staying at 4.3%, or falling to 4.2% are 42%, 28%, and 30% respectively.

J.P. Morgan sees overall risk tilting towards a lower rate, more likely hitting 4.2%. Supporting factors include: the four-week average for continued jobless claims matches mid-2023 levels, when unemployment was still at the 3% range; Conference Board job market spread fell from 7.5% in April to 6.9% in May but remains near cycle lows, as does NFIB hiring plans, both suggesting some cooling in the labor market. J.P. Morgan also expects labor force participation to dip slightly from 61.8% to 61.7%.

Additionally, in May, positive seasonal residuals affect the unemployment rate— for the past three consecutive years, the unrounded May unemployment rate had an average upward bias of about 0.12 percentage points, making the rounding threshold to 4.4% not high.

Fed Tilts Toward Inflation—Strong Jobs Data Raises Rate Hike Concerns

The latest FOMC minutes show most members believe recent data signals the labor market has stabilized and expect conditions to remain steady; some believe slow job growth simply reflects labor supply constraints rather than market weakness, though a minority see it as potential weakness. Overall, most members view employment risks as leaning downward.

Even so, as the labor market stabilizes, officials' focus is now clearly on price pressures. Some warn persistently high energy prices and tariffs may spark broader inflation, shaking long-term inflation expectations, and intensify the policy tradeoff between jobs and inflation—putting the dual mandate in conflict. Currently, money market pricing gives a 56% chance of a rate hike this year, 42% to keep rates at 3.50–3.75%, and only 2% for a cut.

BofA rates strategist Mark Cabana notes since last month's payrolls data, market pricing for Fed hikes within a year has jumped from 5–6 basis points to about 35. BofA thinks if unemployment falls to around 4.0%, even the dovish FOMC may have to hike; strong jobs data could move the dual mandate in the same direction, posing upside risk for Treasury yields.

Scenario Analysis: Narrow Stock Market "Sweet Spot", "Just Right" Only 40% Probability

According to J.P. Morgan market intelligence head Andrew Tyler, due to added uncertainty from Middle East tensions, tonight's jobs data is somewhat less important for markets overall, but its impact can't be ignored.

Based on J.P. Morgan's scenario analysis, S&P 500 reacts to different job gain ranges as follows:

Jobs added > 130,000: Index expected to fall 1% to rise 0.5%, probability just 5%;100,000–130,000: Index to fall 0.25% or rise up to 0.75%, probability 25%;70,000–100,000 ("comfortable zone"): Index likely to rise 0.5%–1%, highest probability at 40%;40,000–70,000: Index expected to fall 0.75% to flat, probability 25%;Below 40,000: Index may fall 1%–1.5%, probability 5%.

Overall, scenarios triggering varying degrees of stock declines account for about 60% probability.

Meanwhile, tonight's SPX straddle options price at about 47 basis points, lowest since December 2024, reflecting conservative volatility pricing for this "agonizing payroll night".

Risk DisclaimerThe market carries risk; investment requires caution. This article does not constitute personal investment advice and does not take into account individual users’ unique investment objectives, financial situations, or needs. Users should consider whether any opinions, views, or conclusions in this article are suitable for their particular circumstances. If you invest based on this, you bear the responsibility. ```