Tonight's Nonfarm Payrolls: How "bad" do the numbers have to be to prompt a 50 basis point rate cut?

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The cooling trend in the US labor market is facing a critical test. The August Nonfarm Payrolls report, to be released tonight at 20:30, will reveal to investors the true pace of economic slowdown. The market is holding its breath, assessing whether this data will be enough to prompt the Federal Reserve to initiate a large rate cut of 50 basis points.

The market generally expects that the number of new nonfarm jobs added in August will be 75,000, basically in line with July’s lackluster increase of 73,000, while the unemployment rate is expected to edge up to 4.3%. After Fed Chair Powell sent dovish signals at the Jackson Hole Global Central Bank Symposium, the market has largely priced in a 25 basis point rate cut in September.

However, an extremely poor report could prompt Powell to choose a 50 basis point rate cut. According to Standard Chartered, for a 50 basis point rate cut to be "put on the table," investors may need to see nonfarm employment increase by less than 40,000, with the unemployment rate reaching or exceeding 4.4%.

Apart from the number of new jobs, investors will also closely watch the revised data for previous months. The July report shocked the market by drastically revising down the May and June employment numbers, serving as a key catalyst for the Fed’s policy shift. In addition, the annual benchmark revision preliminary value, to be released by the US Bureau of Labor Statistics next week, could become another "black swan" event to ignite the market.

Options market pricing reflects an unusually calm expectation: the data shows that traders expect the S&P 500’s movement on the report day to be only about 0.70%—one of the lowest historical volatilities on nonfarm payroll days.

Market Expectations: Slower Growth, Rising Unemployment

According to media survey consensus, economists expect the US economy to add 75,000 nonfarm jobs in August, with forecasts ranging from 0 to 144,000. The unemployment rate is expected to rise to 4.3% from July's 4.2%, still below the Fed’s year-end median projection of 4.5%. In terms of wage growth, average hourly earnings are projected to grow 0.3% month-on-month, with the year-on-year rate slowing from 3.9% to 3.8%.

Expectations for this report are already quite pessimistic. July’s nonfarm report was already very weak, with only 73,000 new jobs added, while the previous two months (May and June) were revised down by a combined 258,000—revealing a labor market much colder than initially thought. Powell admitted to downside risks in the labor market after this report and began regarding unemployment as a core indicator to watch.

Several special factors should be considered when interpreting the August data. First is the “August initial estimate bias”, as historical data show that the initial value of the August report tends to be weak and then revised up later. In 10 of the past 15 years, August job growth was below expectations, likely partly due to seasonal adjustments.

Second, government policy is having a direct impact on the labor market. The hiring freeze and layoffs imposed by the Trump administration are expected to continue dragging down federal government employment. Goldman Sachs expects government jobs to decrease by 20,000 in August. In addition, slower immigration policy may also affect industries that rely heavily on immigrant labor, whose employment growth has already slowed from a monthly average of 27,000 in 2024 to 4,000 per month in Q2 of this year.

Leading Indicators Are Weak Across the Board

According to previous articles by Jianshi, a series of leading indicators have already painted a bleak picture for the market ahead of the official report:

Initial Jobless Claims: During the NFP survey period, both weekly initial and continued jobless claims increased.“Mini Nonfarm” ADP Employment Numbers: Private sector ADP jobs increased by only 54,000 in August, far below the previous value of 106,000. Both the ISM manufacturing and non-manufacturing PMI employment subindices remained in contraction territory.Challenger Report: The August Challenger Report showed corporate hiring intent at its lowest August since 2009, with layoffs surging.Job Openings: The July JOLTS indicated that, for the first time since April 2021, the number of unemployed people exceeded job openings, signaling the US labor market has shifted to demand constraint and hinting at recession.Consumer Confidence: The Conference Board survey reported a decline in the percentage of consumers saying “jobs are plentiful” and a rise in those saying “jobs are hard to get”, with the labor market differential down to its lowest since February 2021.

Potential Blockbuster Revision

Apart from the monthly data, a potentially larger shock comes from next week’s employment data benchmark revision. The US Bureau of Labor Statistics will release its 2025 preliminary benchmark revision on September 9. The market expects this revision could downwardly adjust total employment as of March 2025 by 500,000 to 1,000,000, implying previous job growth has been overestimated by 40,000 to 85,000 per month on average over the past year.

Notably, March 2024’s employment level was revised down by 598,000 in the final adjustment, which was considered one of the most important catalysts for the Fed’s “large” 25-basis-point cut at that time. Thus, even if the August report is lackluster, next week’s benchmark revision alone may provide a strong reason for decisive Fed action.

How High Is the 50 Basis Point Threshold?

With a 25-basis-point September cut fully priced in, everyone is focused on the possibility of a 50-basis-point cut. According to Standard Chartered, for a 50-basis-point cut to be “put on the table”, investors may need to see nonfarm payrolls below 40,000, and unemployment at or above 4.4%.

J.P. Morgan’s market intelligence unit points out that a weaker-than-expected report will increase calls for a 50-basis-point cut. But the real risk lies in a surprisingly strong result—such as new jobs reaching 175,000 to 200,000—which could force the Fed to pause its rate-cut cycle. They believe next week’s CPI data is even more crucial than this employment report, as a hot inflation number combined with strong jobs data would be the most likely scenario to make the Fed pause.

As previously mentioned by Jianshi, Federal Reserve Governor and dovish dissenter Waller recently reiterated his call for rate cuts, stating that the Fed should start cutting this month and continue for the next several months, though he remains flexible about the pace as it will depend on future data. Therefore, tonight’s report will not only affect the September decision but also shape expectations for the future path of rate cuts.

How’s the Market Pricing In?

Options market data shows that implied volatility suggests the S&P 500's one-day move after the report is expected to be about 0.70%, a relatively mild level. According to J.P. Morgan’s market intelligence, the market’s reaction to the jobs data is positively skewed, indicating that investors largely believe the data is unlikely to affect the Fed’s September rate cut decision.

This unit provided a detailed scenario analysis:

New jobs above 110,000: S&P 500 up 1% to down 1.5% (probability 5%)New jobs between 85,000 and 110,000: S&P 500 up 0.5% to 1.25% (probability 25%)New jobs between 65,000 and 85,000: S&P 500 up 0.5% to 1% (probability 40%)New jobs between 40,000 and 65,000: S&P 500 up 0.25% to 0.5% (probability 25%)New jobs below 40,000: S&P 500 down 0.25% to 0.75% (probability 5%)

Goldman Trading Desk: "Just Right" is Best

Several analysts from Goldman’s trading desk believe that a “not too bad, not too good” or slightly weak report is the most welcome outcome for risk assets.

Vickie Chang of Goldman Sachs Global Macro Research said her team forecasts 60,000 new jobs and a modest climb in the unemployment rate to 4.3%. This falls within the benign outcome range: not challenging the growth assumptions priced into the market, while supporting September rate cut expectations. She warns that if the unemployment rate suddenly jumps to 4.4% or higher, markets will start fearing recession, dragging down stocks. On the other hand, a truly strong report would reverse the market’s dovish expectations for the Fed, hurting risk assets.

US portfolio strategist Ryan Hammond adds that investors appear to be "looking through" recent weak data, focusing instead on promising growth and earnings prospects for 2026 and expectations of Fed easing. He believes an in-line or slightly better-than-expected report would validate this view, but the S&P 500's upside will be moderate.

Goldman ETF/index basket volatility trader Shawn Tuteja thinks this NFP backdrop is “fuzzier” than previous months: on the one hand, the upcoming rate-cut cycle makes it difficult for markets to price in a “policy mistake” theme after slightly weak data; on the other, the recent AI sector pullback and rotation have led some clients to reduce risk exposure and become more defensive.

Index volatility trader Joe Clyne says that, with skew near highs and volatility off the lows, S&P 500 put spread options for October are the “best hedge” against weak data.

Risk Warning and DisclaimerThe market has risks, and investment needs caution. This article does not constitute personal investment advice, nor does it take into account any particular user’s investment objectives, financial situation, or needs. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Investing according to this is at your own risk. ```