US April Non-Farm Preview: Is Fed’s Next Step a Hike or Cut? US Stocks May End One-Sided Rally

TradingKey - At 8:30 a.m. ET on May 8, the U.S. Bureau of Labor Statistics (BLS) will release the April nonfarm payroll data. Against a backdrop of geopolitical tensions fueling inflation, the nonfarm payrolls will serve as a key barometer for the labor market and will influence the Federal Reserve's interest rate policy trajectory.

The latest JOLTS job openings data released by the BLS shows that job openings in March fell from a previous 6.922 million to 6.866 million, a decline of about 56,000, though still slightly above the market expectation of 6.835 million; the job openings rate dropped from 4.2% to 4.1%.

Over the past year, U.S. companies have maintained a cautious stance toward hiring. However, hiring activity appeared to rebound in March, with the number of hires increasing 13.37% month-over-month to 5.554 million, and the hiring rate rising from 3.1% to 3.5%, reflecting that the labor market retains some resilience after a prolonged period of weakness.

On the other hand, although the number of job openings declined in March, the decrease was smaller than the drop in the number of unemployed persons (which fell by 332,000), resulting in the job openings-to-unemployed ratio improving from 0.91 to 0.95. This figure remains far below the nearly 2:1 level seen in the post-pandemic era, further supporting the Fed's view that the current labor market is not a primary driver of inflation.

[Source: U.S. Bureau of Labor Statistics, March Nonfarm Payroll Report]

Furthermore, nonfarm payrolls increased by 178,000 in March, far exceeding the market expectation of 65,000 and marking the largest monthly gain since late 2024. The unemployment rate fell to 4.3%, lower than both the previous value and the market forecast of 4.4%.

In recent months, labor market data has fluctuated, with no clear signal of a sustained upward trend yet. However, considering last month's nonfarm payrolls, the overall employment data currently leans toward being steady and positive. This upcoming report is expected to further reinforce the pattern of labor market recovery.

Returning to the April nonfarm payroll report due this Friday, the market currently expects 60,000 jobs to be added, with the unemployment rate holding steady, wage growth increasing, and the labor force participation rate rising further. According to Bloomberg economists, job growth in the private sector is expected to show stronger momentum, which could end the significant volatility seen in employment data during the first three months of this year.

On the other hand, the U.S. economy has demonstrated resilience against oil price shocks, with some sectors even benefiting from them; trade data will also likely show a significant increase in U.S. energy exports for April. It is reported that a major reason economic activity has remained robust is the gradual stabilization and marginal improvement of the labor market.

Given that the current U.S. equilibrium employment growth rate is near "zero," any positive growth in this data should, in theory, push the unemployment rate down. This is consistent with the latest data from the Chicago Fed's forecasting model, which currently projects a real-time unemployment rate of 4.23% for April, slightly lower than the figure released by the BLS last month. This forecast is primarily attributed to a slight improvement in employment conditions as measured by the job-finding rate for the unemployed published by the Chicago Fed.

Interestingly, John Williams, the Fed's "third-in-command," recently projected that the unemployment rate will remain between 4.25% and 4.5%. Historically, policy communications usually only provide one decimal place, such as 4.3%, yet he specifically cited 4.25%. I would venture to guess that this convention-breaking two-decimal lower bound is the "hard floor" for the unemployment rate implied by the Fed.

[Source: Chicago Fed]

Overall, the market generally believes that April's nonfarm payrolls will still show steady growth. We look at the market outlook through two scenarios:

Scenario 1: Nonfarm payrolls grow steadily, confirming a stabilizing and recovering labor market, which aligns with Chair Powell’s previous comments on strong economic fundamentals. Additionally, as Middle East tensions fuel inflation, expectations for rate cuts this year would be significantly delayed, and the Fed would maintain restrictive interest rates for longer, potentially even raising hike expectations. This would lead to higher Treasury yields and a likely structural divergence in U.S. stocks, where growth stocks are pressured while cyclical and energy sectors benefit. Combined with the recent gains and high sentiment in U.S. equities, the market might end its unilateral uptrend and shift into a range-bound consolidation pattern.

Scenario 2: Nonfarm payrolls fall short of expectations, weakening signs of labor market stabilization. Despite persistent inflationary pressures, the Fed would rebalance its dual mandate of full employment and price stability. The combination of Middle East tensions and weakening employment would make the Fed's policy outlook more complicated and increase uncertainty, potentially pulling forward rate cut expectations and driving a rebound in rate-sensitive sectors due to policy easing bets. This would cause Treasury yields to fall, with rate cut expectations becoming the dominant market force, benefiting growth and technology sectors.

However, another segment of the market suggests that even if this nonfarm report misses expectations, it will not dispel current rate hike expectations. ING pointed out that even if this week's nonfarm data shows a significant decline, given the recent volatility in employment data and the new perspective that "the labor force size may have plateaued," it may still be insufficient to eliminate market expectations for a potential Fed rate hike.

[Source: FedWatch]

According to the CME FedWatch Tool: The probability of the Fed keeping rates unchanged in June is 95.4%, with a 4.6% probability of a cumulative 25-basis-point cut. For July, the probability of keeping rates unchanged is 89.3%, with a 10.4% probability of a cumulative 25-basis-point cut and a 0.3% probability of a cumulative 50-basis-point cut.