Payrolls matter more for the market than Fed?

Market wrap

Hardly anything to wrap as yesterday US markets were closed for US Independence Day, with  President Trump calling for “unity” at a Fourth of July speech at the nation’s capital. US S&P futures trading at record highs for the cycle overnight, though the Asian session was rather lackluster heading into today’s important US data releases.

Trading interest

Note: Traders might consider using very short-dated options to protect USD shorts in lieu of market stops over the US payrolls release today…may result in more cost, but keeps the trade alive regardless of short-term price movement.

• Maintaining USDJPY shorts with stops just below 108.50 

• Maintaining half EURUSD long with stops below 1.1225 (looking to add early next week if >1.1350)

• Maintaining long AUDNZD with stops below 1.0425 targeting minimum 1.0625, eventually 1.0700

• Maintaining EURNOK shorts with stops above 9.675 for a look at 9.50 and lower eventually

How important are US payrolls today?

The market narrative has been dominated lately by the question of the size of the Fed’s rate cut at the July 31 FOMC meeting, in which the majority are still looking for a 25 basis move rather than a 50 basis point chop. And they see today’s US June jobs report, especially the June Nonfarm Payrolls Change number as the possible arbiter of the Fed’s decision at that FOMC meeting. (Note, as we have previously pointed out, that revisions of the prior two months’ data can carry additional weight on top of the headline release. We pointed recently to an article by the redoubtable A. Gary Shilling highlighting the importance of recent consistent negative revisions to payrolls change that suggest payrolls growth may have taken a cycle turn for the worst in April and that the US may even already be in recession.)

While the market may prove highly reactive to a surprise either way, I think it is already very highly likely that the Fed cuts 50 basis points at the July meeting for two reasons. First, despite the snowballing anticipation of significant Fed easing, the US yield curve has entirely failed to steepen, and in fact in recent days long yields have flattened more aggressively and reversed what looked like a budding steepening of the yield curve. A flattening yield curve suggests the fed is behind the curve in providing stimulus. Second, the US dollar has failed to materially weaken and is still not far from the multi-decade highs, according to the Fed’s measure of the trade-weighted USD, at least.

A pivot in risk appetite?

The complacency levels across global markets are remarkable. Equity markets are massively bid, corporate credit is complacent, and EM carry traders have been rewarded with spectacular returns. Two of the best performing currencies since the May 1 FOMC meeting are the Turkish lira, up over 10% carry adjusted versus the USD, and the Argentine peso, up over 15% over the same timeframe. So today possibly offers an important sentiment test in the even we get bad – and especially very bad – US jobs data and whether such data continues to egg on risk-taking from the perspective of lower rates and the anticipation of further easing from the Fed and other central banks, or whether the mentality changes on fears of an incoming recession and whether the Fed is still badly behind the curve.

Perhaps equally interesting would be a decent upside beat for the US payrolls number today and how the market digests that – are we in the upside-down world where US economic strength is the worst thing in the world for markets because it throws into doubt the progress of the oncoming Fed gravy train?

Chart: AUDUSD

Watching the key resistance zone in AUDUSD here as we ask the risk appetite pivot question above. If we have both weak US data and the market continuing to celebrate and even-lower, even-quicker Fed policy rate, as opposed to fretting the global growth downturn, then AUDUSD may continue to pull higher here – looks pivotal in this area between 0.7000- and 0.7100 either way.