We expect headline job gains cooled to 40k in Aug from 73k in July. The slowing trend in payrolls reflects slowing immigration but also weak hiring. The unemployment rate should increase further we think to 4.3% assuming an unchanged labor force participation rate. If our forecast materializes, this would be the highest reading since October 2021.We see risks as titled to the upside for the unemployment rate. Average hourly earnings (AHE) growth likely just rounded down to 0.3% m-o-m. Lead indicators for job gains have been -ve in Aug as per various Fed surveys. Continuing claims remain elevated near their Sep'21 highs. The Conference Board’s labor differential, a reliable indicator of labor demand, dropped to 9.7 in August, its lowest print since February 2021. To us, the labor market is losing momentum. Policymakers have started to flag increasing downside risks to labor markets, while pushing back against over-indexing to monthly NFP numbers and focusing on the unemployment rate. But changing labor demand and supply dynamics have kept the unemployment rate relatively stable lately. We expect the unemployment rate to resume its gradual uptrend, primarily driven by a slowdown in hiring than a rise in layoffs. We believe differently. For us the neutral rate of monthly NFP is 75k and not 50k as some Fed speakers pointed out recently. UR in itself might not rise to 4.5% if LFPR remains low. Hence if Aug NFP nos come as per our estimate, Fed should be more concerned about it’s labor mandate than the price stability mandate. There are 3 scenarios we see for Aug NFP reading: 1) Headline at 40k and UR at 4.3% as per our estimates will lead to Sep cut being totally priced and REMCY25 cuts will go to 65bps from the current 56 bps. This will also lead to some downside risk in US equities and accentuate recent inflows into EM equities, and broad USD underperformance to emerge. 2) However, if NFP is notably weak at close to zero or below, there is a risk that the market will shift to front-loaded cuts from the Fed with the USD likely to see significant near-term weakness. We also see some risks that a weak NFP could lead to US equity weakness, but this is less of a clear positive for EM FX – especially if any near-term US equity correction is relatively sharp which could be favorable for our short USD against JPY position. 3) On the other hand, if NFP is stronger than expected (such as around +150K+), the risk is that the September FOMC meeting might be a close call (50-50 likelihood of a cut), leading the USD initially or marginally higher with the next key determinant for the September FOMC being August core CPI data (11 September, consensus 0.3% m-o-m).
