Non-farm correction night: The Federal Reserve is going to "copy the homework" and drop 50 basis points? The market is betting on this!

On Tuesday (September 9), the US Bureau of Labor Statistics (BLS) will release the preliminary baseline revision of the annual non-farm payroll data from the 2025 agency survey at 22:00 Beijing time.

The preliminary revision will cover the 12-month period ending in March 2025, with the final baseline revision to be included in the employment report to be released in February 2026. The Bureau of Labor Statistics made it clear: "Official agency survey estimates will not be updated based on this preliminary baseline revision; the final baseline revision will be included in the official estimate when the January 2026 Employment Situation Report is released in February 2026."

When the BLS released its annual preliminary baseline revision in August 2024, it mentioned that in the 12 months ending in March 2024, the U.S. economy actually added 818,000 fewer jobs than initially reported, which means that the actual employment growth during that period was 30% lower than initially disclosed.

In response, the Federal Reserve cut the policy rate by 50 basis points on September 18, 2024, thereby reducing the federal funds rate from 5.5% to 5%. The market reaction at the time was that the dollar index fell rapidly by 0.78% due to the announcement of the interest rate, but then Federal Reserve Chairperson Jerome Powell hinted that policymakers are not in a hurry to cut interest rates sharply in the future, and that US economic data are strong and inflation is under control. The dollar index then rose rapidly to recover lost ground.

In the face of the upcoming annual non-farm data revision, how will the dollar index react, and on the 18th of this month, with the Federal Reserve's final decision on interest rates, whether the same will happen to the dollar index, we need to combine the recent labor market conditions and inflation data to make a trading plan.

(Timescale chart of the US dollar index on September 18, 2024)

The US labor market is showing a cooling trend

The latest employment report showed that the number of non-farm payrolls increased by 22,000 in August. Before that, the number of non-farm payrolls increased by 79,000 in July (revised from the original 73,000), and the value was much lower than the 75,000 expected by the market. The BLS also pointed out that the number of non-farm payrolls in June has been revised down from 14,000 to 27,000, and the revised number is - 13,000 (that is, a decrease of 13,000). In the previous employment data released in July, the growth rate of non-farm payrolls in May has been revised down sharply, from 144,000 to 19,000.

On August 22, Jerome Powell, chairperson of the US Federal Reserve, admitted at the annual Jackson Hole economic symposium that downside risks to the labour market were heating up, noting that tighter immigration policies had led to a "sharp slowdown" in labour supply growth.

According to the CME Fed Watch Tool data, the probability that the Fed will cut interest rates by 25 basis points in each of the remaining three meetings of the year, and at least 75 basis points in total throughout the year, has climbed from about 40% before the release of the employment data to nearly 75%.

At present, according to the results of interest rate futures trading, the probability of interest rate cuts in the United States in September is 100%, and there is an 11.9% probability of interest rate cuts of 50 BP.

(CMEFedWatchTool data)

Does the Federal Reserve have room to cut interest rates significantly next week?

If the initial benchmark revision shows that the US labor market is in worse shape than expected, the market may see this as an opportunity for the Federal Reserve to take dovish measures at its upcoming policy meeting.

Steve Englander, head of global G10 FX research and North American macro strategy at Standard Chartered, pointed out that the Fed is likely to make a "catch-up" 50 basis point rate cut at its September meeting, as it did this time last year.

"The market is pricing in a September rate cut of 28-29 basis points, with no clear shift towards 50 basis points," Mr. Englander explained. "We acknowledge that we are anticipating early, but expect a preliminary revision in the April 2024-March 2025 jobs data to support our 50 basis point view."

He added: "Given the distorting effects of the birth-deathadjustment and the more pronounced downward trend in the employment-to-population ratio, we continue to believe that the headline non-farm payrolls and unemployment data understate the extent of labour market weakness."

(Dollar index daily chart, source: Internet)

At 19:58 Beijing time, the dollar index was trading at 97.47.