The U.S. non-farm payroll report for October will be released on Friday (November 6th) at 8:30 a.m. Eastern Time. The market generally expects the data to rebound from its September lows, but the timing of this report is particularly tricky – just one day before its release, tech stocks suffered a heavy blow, with the Nasdaq 100 index plummeting by 6.36% in a single day, marking the worst day since March 2020. AI trading completely collapsed.

The dramatic market shocks on Thursday have profoundly changed the way employment reports are interpreted. The S&P 500 index fell 4.36% in a single day, the Philadelphia Semiconductor Index tumbled 12%, and the VIX Panic Index soared 11.5 points to 28, with market liquidity contracting sharply. Against this backdrop, employment data that exceeded expectations not only failed to boost market sentiment but may have reignited expectations of a Fed interest rate hike in December at the worst possible time, adding further fuel to an already precarious market.

Judging from the reaction in the options market, investors are preparing for significant volatility. On Friday, the implied volatility of the S&P 500 index straddle options rose to 1.45%, the highest one-day pricing level since March this year – whereas on Thursday, the actual realized volatility of the straddle options was nearly eight times the priced level.

Data indicates a rebound, but disagreements still exist.

The market generally expects that non-farm employment in October will rebound significantly from 29,000 in September. A Bloomberg survey shows that Wall Street's forecast range is between 35,000 and 131,000 jobs, with a consensus expectation of around 65,000 jobs. The unemployment rate is expected to remain unchanged at 4.2%, while the average hourly wage is expected to increase by 0.3% month-on-month, and the year-on-year growth rate is expected to fall to 2.9%, marking the first time it has fallen below 3% since May 2021.

Goldman Sachs predicts a rise of 75,000 non-farm jobs, higher than consensus expectations, and estimates a gain of 70,000 jobs in the private sector. Goldman Sachs' forecast is based on the following: the number of initial jobless claims dropped to 195,000 during the reference week of October's survey, lower than 204,000 in September; JOLTS data shows that job vacancies surged unexpectedly by 333,000 to 7.523 million in September, reaching a new high for the period; ADP private sector employment increased by 86,000, exceeding expectations; Challenger layoff data indicates that 43,994 layoffs were announced in October, a year-on-year decrease of 71%, the lowest since 2023. From a seasonal perspective, Goldman Sachs also notes that when Labor Day falls in a later period of September, employment data usually rebounds in the following October, with an average increase of about 50,000 jobs historically.

However, there are also concerns about downward risks. Tracking data from data service provider Revelio shows that in October, only 26,000 new jobs were created, which is lower than the revised figure of 67,600 from the previous month and represents a significantly lower value than predicted by various institutions.

Unemployment Rate and Salaries: The Details Are Even More Interesting Than the Title

The unemployment rate reading may become a more market-influential variable than the non-farm payroll total on Friday.

The unemployment rate in September, without rounding, was 4.18%, which means that a very small change could push it towards 4.1% or 4.3%. Goldman Sachs, Turnleaf, and the Federal Reserve of Chicago all tend to believe that there is a downside risk to the unemployment rate, suggesting that it may converge towards lower levels implied by the number of people continuously claiming unemployment benefits. Goldman Sachs also noted that its “Lag Tracker,” which combines ten indicators of labor market slack, currently reads at 4.6%, “suggesting that the labor market is actually weaker than what the single unemployment rate indicates.”

At the salary level, if the consensus expectations are met, the annual salary growth rate will fall below 3% for the first time in over four years.

Goldman Sachs' broad-based wage tracker, which combines multiple salary indicators, shows that the year-on-year quarterly growth rate was 3.0%, and the year-on-year growth rate for the third quarter was 3.3%. Deutsche Bank's estimated proxy indicator for nominal wage growth is expected to decline slightly to 4.1%, but the bank believes that this level "still supports robust consumer spending growth." Notably, productivity in the third quarter soared by 3.6%, far exceeding the expected 2.7%, while unit labor costs unexpectedly fell by 0.7%.

Fed path: Expectations of interest rate hikes eroded by the collapse of AI

At the October interest rate meeting, the Federal Reserve remained inactive, but two members cast dissenting votes.

Federal Reserve Chairman Warsh signaled that interest rates will rise at a "moderate pace." During the sharp decline on NASDAQ on Thursday, the Hammack of the Cleveland Federal Reserve still stated that monetary policy "needs to shift to a more restrictive stance" and favored "more frequent, smaller adjustments"; meanwhile, the Barkin of the Richmond Federal Reserve indicated that further rate hikes are expected, but the "magnitude and pace" remain uncertain.

Goldman Sachs economists expect the Federal Reserve to raise interest rates for the second and last time in December, raising the target range for the federal funds rate to 4.00%-4.25%, after which it will pause and then resume rate cuts from the end of 2027 to the beginning of 2028. Before this week, the market's implied pricing for a rate hike in December was about 21 basis points (with a probability of about 83%).

After the sharp sell-off in the AI sector on Thursday, the implied pricing for a rate hike at the December meeting has dropped to 17.25 basis points (with a probability of about 70%), and the yield on 2-year U.S. Treasury bonds has fallen by about 12 basis points amid a steep upward trend in the bull market. Goldman Sachs' interest rate sales team pointed out that there are two major downside risks facing short-term and medium-term interest rates: one is that Trump may restart strikes against Iran after the midterms, reigniting inflation expectations; the other is that the collapse of AI transactions could have a substantial impact on growth. According to a report by Axios on Thursday evening, Trump stated that a decision regarding the war with Iran is "imminent."

Good data might be exactly what the market least needs.

Overall, before the release of this non-farm data, the fundamentals of the labor market presented a strong pattern that has been rare in recent years: the number of initial jobless claims approached a 57-year low, the number of layoffs in October was the lowest since 2023, JOLTS job vacancies increased significantly by 333,000, and ADP the data was better than expected. Under these circumstances, the risk of employment data exceeding the consensus expectation of 65,000 is actually on the higher side, and there is also a possibility that the unemployment rate could decline.

That's precisely the issue. A strong report would provide sufficient grounds for Warsh, Hammack, and Barkin to raise interest rates in December – at a time when NASDAQ has just experienced one of its most brutal trading days since March 2020.

Goldman Sachs' interest rate sales team believes that a single piece of data is not sufficient to completely eliminate the market's pricing for interest rate hikes; rather, it is more likely that a decent employment figure will bring the possibility of a December rate hike back into consideration, adding another interest rate issue on top of the existing AI problems. Given the current positioning of markets – where the CTA strategy has begun to net sell futures, and bullish institutions are "once again stuck in a deadlock" – this is not a recipe for a bottom rebound. Goldman Sachs' model shows that if the market falls another 2.5 standard deviations from the current level, the potential scale of selling in S&P 500 futures could reach $7.48 billion within the next week.

It is worth noting that the revision range of the non-farm payroll data for September compared to August (reduced from the initial estimate to 133,000 jobs, and ultimately to 29,000 jobs) also deserves close attention from the market. The impact of that previous revision on the bond market and interest rate pricing was no less significant than the actual data itself.