Crash of AI! Tonight, a strong non-farm payroll report may deliver another blow to the U.S. stock market

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

The market turmoil on Thursday has profoundly changed the interpretive framework for the employment report. The S&P 500 index fell 4.36% in a single day, the Philadelphia Semiconductor Index plunged 12%, and the VIX fear index jumped 11.5 points to 28, with market liquidity sharply contracting. Against this backdrop, an unexpectedly strong employment data may not only fail to boost market sentiment but could also reignite expectations for a Federal Reserve rate hike in December at the worst possible time, adding fuel to an already precarious market.

From the response in the options market, investors are preparing for significant volatility. On Friday, the implied volatility of S&P 500 straddles rose to 1.45%, the highest single-day pricing level since March of this year—while the actual realized volatility of straddles on Thursday was nearly eight times the pricing.

Data Points to Rebound, but Discrepancies Remain

The market generally expects the October non-farm payrolls to rebound significantly from September's 29,000. A Bloomberg survey shows Wall Street's forecast range is between 35,000 and 131,000, with a consensus expectation of about 65,000. The unemployment rate is expected to remain unchanged at 4.2%, with average hourly earnings expected to increase by 0.3% month-over-month, and the year-over-year growth rate is expected to drop to 2.9%, falling below 3% for the first time since May 2021.

Goldman Sachs predicts an increase of 75,000 in non-farm payrolls, above the consensus expectation, and estimates the private sector employment increase at 70,000. Goldman Sachs' predictions are based on: the number of initial jobless claims fell to 195,000 during the October survey reference week, down from 204,000 in September; JOLTS data showed job vacancies unexpectedly surged by 333,000 to 7.523 million, setting a new cyclical high; ADP private employment increased by 86,000, exceeding expectations; Challenger layoffs data indicated that the number of layoffs announced in October was 43,994, a year-on-year decrease of 71%, the lowest since 2023. From a seasonal perspective, Goldman also pointed out that when Labor Day falls later in September, employment data typically rebounds in the following October, with a historical average acceleration of about 50,000.

However, there are also voices pointing to downside risks. Data from the data service provider Revelio indicates that new jobs in October were only 26,000, significantly lower than the revised figure of 67,600 from the previous month, marking a clear low-end outlier among forecasts.

Unemployment Rate and Wages: Details Matter More Than Headlines

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

The unrounded unemployment rate for September was 4.18%, meaning even a slight change could push it to 4.1% or 4.3%. Goldman Sachs, Turnleaf, and the Chicago Fed all lean towards the view that there are downside risks to the unemployment rate, suggesting it may converge towards lower levels implied by the ongoing jobless claims. Goldman also noted that its composite "slack tracker" of ten labor market slack indicators currently reads 4.6%, "indicating that the labor market is actually weaker than what a single unemployment rate suggests."

In terms of wages, if the consensus expectation is met, the annual wage growth rate will fall below 3% for the first time in over four years.

Goldman Sachs' broad wage tracker, which aggregates multiple wage indicators, shows a third-quarter annualized quarter-over-quarter growth rate of 3.0% and a year-over-year growth rate of 3.3%. Deutsche Bank's nominal wage growth proxy indicator is expected to slightly decline to 4.1%, which the bank believes "still supports robust consumer spending growth." Notably, third-quarter productivity jumped 3.6% year-over-year, far exceeding the 2.7% expectation, while unit labor costs unexpectedly fell by 0.7%.

Federal Reserve Path: Rate Hike Expectations Eroded by AI Collapse

In the October monetary policy meeting, the Federal Reserve held steady, but two members cast dissenting votes.

Federal Reserve Chairman Warsh signaled that rates would rise at a "measured pace." During the Nasdaq's plunge on Thursday, Cleveland Fed's Hammack still stated that monetary policy "needs to shift to a restrictive stance," favoring "more frequent, smaller adjustments"; Richmond Fed's Barkin indicated that further rate hikes were expected, but was uncertain about the "magnitude and pace."

Goldman Sachs economists expect the Federal Reserve to implement a second and final rate hike in December, raising the federal funds rate target range to 4.00%-4.25%, after which it will pause and restart rate cuts by the end of 2027 or early 2028. Before this week, the market's implied pricing for a December rate hike was about 21 basis points (approximately 83% probability).

After the severe sell-off in the AI sector on Thursday, the implied pricing for a rate hike in the December meeting has dropped to 17.25 basis points (approximately 70% probability), with the 2-year U.S. Treasury yield declining by about 12 basis points in a steepening bull market. Goldman Sachs' rates sales team pointed out that the two major downside risks facing front-end and belly rates are: first, Trump restarting strikes against Iran after the midterm elections, reigniting inflation expectations; second, the collapse of AI trading causing substantial growth shocks. According to Axios' report on Thursday evening, Trump stated that a decision on the Iran war is "coming soon."

A Strong Data Release May Be the Last Thing the Market Needs

Overall, ahead of this non-farm data release, the fundamentals of the labor market present a rare strong pattern in recent years: initial jobless claims are near a 57-year low, October layoffs are the lowest since 2023, JOLTS job vacancies surged by 333,000, and ADP data exceeded expectations. In this context, the risk of employment data exceeding the consensus expectation of 65,000 actually leans to the upside, and the unemployment rate may also decline.

The problem lies here. A strong report would provide ample justification for Warsh, Hammack, and Barkin to raise rates in December—at a time when the Nasdaq has just experienced its worst trading day since March 2020.

Goldman Sachs' rates sales team believes that a single data point cannot fully eliminate the market's pricing for rate hikes; rather, a decent employment number is more likely to bring the December rate hike back to the table, adding another rate issue on top of the existing AI problems. Given the current positioning—CTA strategies have begun to net sell futures, and long-oriented institutions are "stuck again"—this is not a recipe for a bottoming rebound. Goldman Sachs' model shows that if the market falls another 2.5 standard deviations from current levels, the potential sell-off scale for S&P 500 futures could reach $7.48 billion within the next week.

It is worth noting that the revision of the September non-farm data for August (from an initial value revised down to 133,000 and ultimately down to 29,000) is also something the market should closely monitor—the last revision had an impact on the bond market and interest rate pricing that was comparable to the headline data itself.