We have finally made it to the main event of the month: the NFP report. At this point, the data might not matter much for the September rate cut as the Fed has cornered itself into it by overreacting to the last soft NFP report. Nonetheless, today’s data will be important for the future outlook and expectations on interest rates.
Yesterday’s US data was overall good, but definitely not good enough to prompt the market to revaluate the current easing expectations. But here’s the thing, the markets positioning is diametrically opposite to the one we had in August…
Back then, the positioning into the NFP was very hawkish. In fact, we had strong US data in July and then a slightly more hawkish than expected FOMC decision. The market pricing showed just 35 bps of easing by year-end and much less than 50% probability for a cut in September.
On the markets side, the US dollar got strong bids into the NFP, while stocks, bonds and gold were offered across the board. Then we got that soft NFP report and big negative revisions for the prior months…
The reaction was very aggressive: we erased all the moves into the NFP report and the expectations for rate cuts strenghtened significantly. Moreover, Fed members started to sound more dovish after the report which culminated into Powell’s dovish tilt at the Jackson Hole Symposium.
In one month, we went from one extreme to the next in terms of expectations…
Today, we have a very dovish positioning. In fact, the market is pricing 60 bps of easing by year-end and 98% probability of a rate cut in September. On the markets side, the US dollar is getting offered across the board, while stocks, bonds and gold rallied significantly into the NFP.
Markets react in a big way when there is such an extreme positioning and a catalyst changes meaningfully the underlying expectations. The catalyst for today is of course the NFP report.
If the data is strong (the stronger, the bigger the reaction), it might not change much for a September cut but it will highly likely trigger a hawkish repricing further down the curve. And given the positioning in the market, we might see big reversals. This is what makes today’s NFP report such a huge event.
Data in line with expectations would be the most boring outcome. From a trading perspective, it wouldn’t offer much but it should keep the established trends going.
On the other hand, another weaker than expected report could see the markets pricing a third rate cut by year-end or even a 50 bps cut in September. This would also trigger notable moves in the markets, but not as extreme as the ones in case we get strong data
