Data Source: BIT Securities
Last night at 20:15, ADP released the employment data for the private sector in August: only 38,000 new jobs, significantly lower than the market expectation of 47,000 to 48,000, and also lower than the revised 46,000 for July, hitting the lowest point since January this year. After the data was released, the market reacted quickly, with CME Fed rate futures reducing the probability of a 25BP rate hike in September, all three major indices closed higher, while the Russell 2000 index, which had dropped over 1.2% during the session, closed up 1.13% at 2953. The small-cap stocks, most sensitive to interest rates, drew a large V within a single day.
In the vast U.S. employment market, why can such a small number in the tens of thousands repeatedly stir the U.S. stock market, U.S. bonds, and gold, and even influence the Fed's rate hike pace? What will the market reaction be after today? What impact will it have on the Fed's FOMC meeting decision next week?
What is ADP's "small nonfarm" employment data?
ADP is one of the world's largest payroll service providers, handling payroll for over 500,000 U.S. businesses and approximately 26 million private sector employees. This coverage represents about one-fifth of U.S. private employment, with nearly one out of every six American workers having their paycheck processed through ADP's system. ADP typically releases its data one to two trading days before the monthly nonfarm employment figures, usually on Wednesday mornings in New York. It is the first systematic employment signal received by the market for the month.
How can a few tens of thousands of new jobs affect the entire U.S. economy with a population of over 300 million?
In rapidly growing economies, job gains can reach hundreds of thousands or even millions, and incremental growth can drive the economy; thus, fluctuations of tens of thousands can indeed be ignored. However, the U.S. is a mature and saturated economy, and the job market has long entered a stable state, with monthly net additions being a small number in itself. In such a market, marginal changes of tens of thousands are sufficient to determine whether employment is heating up or cooling down. This is because its value has never been in absolute numbers, but in marginal direction.
The details of the data are more alarming than the total; how significant is the hidden risk in U.S. employment?
The total of 38,000 actually conceals a significant internal divergence.
The entire private sector is propped up by the service industry. The service sector added a net 48,000 jobs, with education and healthcare alone contributing 45,000; however, manufacturing lost 17,000 jobs, and professional and business services, often viewed as the economic barometer, directly reduced by 16,000. In other words, growth is highly concentrated in a few defensive sectors, while most pillar industries for investment and development are either contracting or stagnating.
The divergence by company size is more striking. Large enterprises contributed 34,000 new jobs, but medium-sized companies had almost zero net addition, while small businesses added only 3,000, revealing the awkward state of U.S. employment earlier than overall data: small and medium enterprises are most sensitive to interest rates and financing costs, their hiring willingness has cooled first.
However, the wage components signal a contrary direction. The base salary for retained employees rose by 3.0% year on year, while job switchers saw total salary increases of as high as 7.3%. Job switching still earns significantly more than staying, indicating that companies are willing to offer premium to attract talent.
The persistence of the "job switching" heat shows that nominal wages still have stickiness. Hiring is cooling down, but wages are not falling alongside — this is precisely the combination that inflation is least willing to see, and also the strongest card in the hands of the hawks.
Will the cooling of ADP save the market?
The "carrier pigeon" brought by ADP data has flown solo for half a day without escaping the shadow of geopolitics. After the data was released, the yield on the 10-year U.S. bonds did indeed drop a notch, but throughout the morning, pricing power remained firmly in the hands of the Strait of Hormuz — Trump threatened to retaliate "more fiercely," and Brent surpassed $95. The inflation risk brought about by supply shocks is even more distant than bullets. As long as oil price shocks persist, the Fed has no space to retract the words "anti-inflation priority." This is the logic for the first half.
The turning point appeared after New York Federal Reserve Bank President Williams spoke. His statement "I haven't seen any abnormal spillover effects from high energy prices" suggests that if the energy shock does not spill over into core inflation, it is merely a one-off shock, not a trend. He added that inflation expectations "remain well-anchored," wage growth is "constrained," and clearly indicated that he has not been convinced about "the need for a rate hike."
Thus, the same data was interpreted two ways on the same day, with the morning reading as "inflation risk trumps everything," and the afternoon reading as "employment is cooling but inflation spillover is limited." The market thus experienced a textbook-level intraday reversal, with the Russell 2000 dropping over 1.2% during the day and then closing up 1.13%, a daily amplitude exceeding 2.3 percentage points. Small cap stocks are the most sensitive to interest rates across the market; their reversal magnitude is a true reading of the variation in interest rate expectations on that day.
What will be validated next: How will employment data influence the Fed?
Wash stated clearly last week at Jackson Hole — "We must be confident that inflation is clearly returning to target," otherwise "there is still work to do." With no talk on the inflation front, employment should be the only variable for policy; if employment weakens, tightening should slow.
The nonfarm data to be released this Friday night will be the next stronger validation. The market consensus currently estimates an addition of 50,000 to 55,000 jobs, an unemployment rate maintained at 4.1%, with several major investment banks providing their professional estimates: Goldman Sachs and Crédit Agricole both predict around 65,000, while Wells Fargo optimistically forecasts 80,000. The release of that evening's data could lead to three scenarios:
Falling within the estimated range — ambiguous. This is the most probable scenario and the hardest to trade: it neither proves employment is collapsing nor confirms that it is still resilient. Market focus may shift to the August CPI to be released in mid-September, volatility may actually converge, and the market will wait for the next catalyst. In this situation, sector rotation may provide more insight than the overall index itself.
Stronger than the estimated peak — rate hikes may be locked down again. This would challenge the narrative of rapidly weakening employment; the probability of a rate hike in September may continue to rise from 70%, and the dollar and U.S. bond yields could strengthen simultaneously. In this scenario, the more fragile assets may include high-valuation growth stocks and small-cap stocks: the rise in the discount rate impacts valuation, not earnings themselves. Gold could come under pressure, but geopolitical risk premium might partially offset this shock — thus, a gradual decline instead of a cliff-like drop is more likely.
If the unemployment rate rises above 4.3% — the doves would truly have ammunition. This could substantially dampen the probability of a rate hike, possibly accompanied by dollar weakness, a rebound in U.S. bonds, and a decline in real yields pushing gold higher. However, one should be wary of second-order risks — if nonfarm data shows negative for two consecutive months, the trading narrative may jump from "rate hikes or hold steady" directly to "are we heading toward a recession," and even an increase in rate cut expectations may not save the stock market at that point, as it would be earnings themselves that would be repriced.
How to guard against the war situation?
Last night's market reminded us that once an external shock of such magnitude as geopolitics intervenes, inflation risks will once again become the dominant variable, and the directional weight of employment data will be temporarily diminished.
If the passage through the Strait of Hormuz continues to be obstructed and oil prices keep rising, inflation expectations will rise again, and long-term yields and rate hike expectations will continue to increase together. At this point, what needs to be guarded against may not only be a unilateral drop in the stock market but also a stagflation-style pullback harming both stocks and bonds — this is exactly a repeat of the market from late February to late March, when the S&P saw a maximum pullback of 9.1% and the VIX spiked to 31. The yield data for 30-year long bonds will be a critical point; once it effectively breaks through, all assets relying on low discount rates may be repriced.
However, should there be an unexpected easing or ceasefire, this direction could be more easily overlooked. Last night's second half actually rehearsed this once: once the judgment of "no spillover from energy" is confirmed, yields could fall, and U.S. bonds and growth stocks would welcome a repair window. However, one should be cautious about gold price changes: its current price contains both "geopolitical risk premium" and "high real interest rate suppression," two opposing forces; once the risk premium disappears, gold may drop before stocks. Gold has already retreated more than 25% from its peak of $5318 in January this year, and that lesson is not far away.
Data Sources
· CNBC: Private Sector Added 38,000 Jobs in August, Below Expectations
· Fox Business: Details of ADP's August Report with July Revised to 46,000
· CNBC: New York Fed President Williams Says Yield Surge Due to Strong Economic Prospects
· Blockonomi: Spot Gold Falls to Three-Week Low Amid 70% Probability of Fed Hike
· TheStreet: Market Conditions on September 2 and the Incident in the Strait of Hormuz
· Forbes: August 31 CME FedWatch Shows 66% Probability of Rate Hike in September
· CNBC: September Decision After Jackson Hole Now a "Coin Flip," Probability of Rate Hike Rises
· CNBC: Odds for September Rate Hike Declined After Large Job Miss in July
· TOPONE Markets: Preview of August Nonfarm Data and Three Scenarios (Consensus +50,000 to 55,000)
· Dallas Fed: Breakeven Employment Growth Has Dropped to Near Zero
· Pew Research: Comparison of the Coverage, Methodology, and Correlation Between ADP and BLS Data
· Federal Reserve: FOMC Meeting Calendar (September 15–16 Including Dot Plot)
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