"Stagflation trades" sweep the market—just how bad do tonight's nonfarm payrolls need to be to revive rate cut expectations?

```

The US April non-farm employment data will be released tonight at 20:30 Beijing time. The market expects about 65,000 new jobs, a significant slowdown from March’s 178,000. However, the core judgment among most Wall Street institutions is highly consistent: Against the backdrop of persistently high inflation and escalating Middle East conflict, regardless of tonight’s data strength, the chance of a Fed rate cut this year is nearly zero—"Stagflation trade" is becoming the new market mainline.

Latest policy signals show that the interest rate swaps market now prices in zero Fed rate cuts for the whole of 2026. Goldman Sachs believes, a rate cut will only return to the table if unemployment rises to 4.5% or if there is clear negative job growth, not merely a monthly report below expectations. The April Fed meeting saw three hawkish dissent votes, calling for the removal of the current dovish guidance; Powell admitted in his last press conference that now more officials see odds of rate hikes and cuts as roughly equal. Meanwhile, incoming Fed Chair Waller, though favoring lower rates, advocates shrinking the balance sheet, making the policy outlook more complex.

The market significance of tonight’s data is concentrated at two extremes: If data is slightly below expectations, analysts generally attribute it to the fading of March statistical disturbances, which will likely be "skipped" by the market; if data is much higher than expected, it will further cement the "prolonged pause" narrative, and could trigger a repricing for rate hikes, pushing US bond yields higher. According to Goldman Sachs’ trading desk, implied daily volatility in S&P 500 options is about 1.3%.

Deeper pressure comes from inflation. The ongoing oil price rise due to Middle East conflict continues to boost inflation expectations. Goldman Sachs’ global macro research head Vickie Chang notes the worst combination for equities is "non-farm beats expectations and energy prices transmit to core inflation above expectations”—which would make the Fed stick to tightening in face of inflation shocks, and labor market resilience would become a reason against rate cuts.

Significant divergence in expectations, technical factors key variables

Market consensus expects 65,000 new jobs in April, with a very wide forecast range: Sough bay Research gives a high of 133,000, Citi predicts possible negative growth of -15,000. Among main institutions, Goldman Sachs forecasts 75,000, slightly above consensus; JPMorgan forecasts 50,000; Bank of America Merrill Lynch forecasts 80,000, the most optimistic among majors; Barclays forecasts near zero growth.

The divergence centers on interpreting the "inflated" component of March data. JPMorgan points out that over the past three months, private employment numbers were +180,000, -129,000, +186,000 respectively—very volatile. Removing the statistical rebound from the end of the Kaiser permanent healthcare workers strike and favorable weather, two-month average job gains are only 20,000~30,000. Barclays believes these reversing factors will jointly suppress the April headline number, favoring a flat forecast.

High-frequency indicators are also mixed. ADP April private employment rose 109,000, below the 120,000 expected, but Pantheon Macro notes its average absolute forecast error against BLS initial values for the past year is as high as 85,000, making interpretation risky. Revelio’s private job estimate is 51,000, a one-year high. For initial jobless claims, the reference survey week was 215,000, a bit above March’s 205,000; but the following week has dropped below 200,000, some models see this as a positive sign, but Barclays warns standard models based on claims risk overestimating momentum, as they extrapolate from March’s high reading.

Structural cracks in employment: K-shape divergence deepens

Beneath headline data, internal divergence in the labor market is intensifying. Bank of America Merrill Lynch economist David Tinsley observes, overall wage and jobs data seem robust, but the internal "K-shaped" structure is very obvious. BofA data shows post-tax wage growth of 6% for the top third of earners in April, but only 1.5% for the lowest group—while consumer price index rose 3.5% year-on-year, meaning the low-income group faces real net income losses.

Industry-wise, the ISM manufacturing employment sub-index dropped to 46.4 in April, shrinking for the 31st straight month. 60% of surveyed firms say they’re "managing headcount" rather than recruiting, 34% rely on layoffs, 43% on natural attrition, and only five industries achieved job growth. The ISM services employment index rebounded from 45.2 to 48.0 but remains in contraction. S&P Global PMI shows only slight job growth in April, manufacturing jobs fell for the first time in nine months, marking the weakest two-month streak since end-2024; services job gains were described as "modest", with companies citing attrition, labor shortages, demand uncertainty and cost pressure as obstacles.

NY Fed President John Williams also noticed these divides this week, stating there are "conflicting signals" between hard and soft labor market data, describing the situation as "low hiring, low firing", stressing the need to monitor if this state is changing.

Fed framework has shifted: Cooling jobs won’t yield rate cut room

The impact of this nonfarm report on monetary policy must be interpreted in a fundamentally changing decision framework. Powell made clear the labor market is no longer a source of inflation, but the policy focus has shifted to inflation management; he also said policy is in the right "wait-and-see" position, with energy and tariff risks as main concerns.

Three FOMC members in April’s meeting publicly called for removing the "dovish tilt" guidance; some non-voting members hold similar views. Analysts think the June meeting may shift policy tone to neutral—however, Waller’s public preference for low rates may delay hawkish language being officially adopted.

Goldman Sachs rates trader Brandon Brown notes market focus has shifted in the past two months from jobs to inflation and inflation expectations, which is reflected in rate pricing and Fed dissent votes. He thinks, a rate cut discussion only returns if unemployment hits 4.5% or job data turns obviously negative, not just from a soft monthly report. BofA economist Shruti Mishra has a similar judgment: Unemployment at 4.3% or lower means the Fed stays put as inflation risks rise; even if data is weak, the market won’t price in rate cuts prematurely before war risks recede.

Scenario analysis: Strong data is a “stagflation trade” accelerator

JPMorgan’s US market intelligence team presents S&P 500 expected responses under five nonfarm scenarios:

New jobs above 125,000: index volatility -1% to +1%, probability 10%;85,000-125,000: volatility 0 to +0.75%, probability 25%;45,000-85,000: volatility -0.5% to +0.5%, probability 30%;5,000-45,000: volatility -0.5% to +0.25%, probability 25%;Below 5,000: index may rise 0.5%-1.0%, probability 10%.

JPMorgan overall thinks the report is unlikely to change the "wait and see" outlook, as it views current inflation shock as temporary.

In rate markets, BofA strategists Mark Cabana and Bruno Braizinha note the market is more sensitive to positive nonfarm surprises than negative, since stronger data enhances the right tail risk for hikes. The rates options market prices implied volatility for the 10-year Treasury at 6-6.5bp on NFP day, above the historical average of 4.9-5.4bp.

In FX, BofA FX strategist Alex Cohen says strong nonfarm helps open upside room for Fed rate hike expectations and boosts the dollar; but Waller’s higher bar for hikes somewhat suppresses dollar reaction elasticity. If data is soft, expected EUR/USD volatility does not exceed ±0.5%.

Investment strategy: Long volatility, avoid low income consumption exposure

On the operational side, Wall Street institutions are already adjusting holdings around the "stagflation trade" theme. Goldman Sachs equity vol trader Cindy Lu recommends watching short-term volatility, especially favoring S&P 500 1-month 25Delta calls (current vol about 13), and also the Nasdaq 100 vol—with Nvidia earnings approaching, its spread premium vs S&P 500 should be supported. Her calculations show next Tuesday’s S&P 500 straddle (covering NFP and CPI) is quoted at about $93 (~1.26%), and Goldman thinks it’s worth holding.

For thematic strategy, Goldman Sachs’ Faris Mourad advises that in a macro environment of "low growth, high inflation, persistently high oil, fewer near-term rate cuts," one should focus on structural long-term themes immune to short-cycle impact, including AI data center infrastructure and equipment (memory, cooling, AI chip suppliers, fiber networks and non-residential construction), power, and US domestic solar stocks.

On the short side, Mourad recommends targeting low-income consumers and discretionary consumption exposures. He notes since Middle East conflict erupted, gasoline prices have surged nearly 40%, and low-income households spend about four times as much on gasoline as high-income ones; combined with food cost inflation and negative policy effects on low-income groups, their real income growth will lag noticeably, and the recent share price rebound is already beyond what earnings can reasonably support.

Risk warning and disclaimerMarkets have risks, investments need caution. This article does not constitute personal investment advice and does not take into account special investment goals, financial conditions or needs of individual users. Users should consider whether any opinions, views or conclusions here fit their own circumstances. Investment is at your own risk. ```