A Week Is A Long Time For Markets

Where We Stand – While a week may be a long time in politics – just as Sue Gray – the same can also be said of the financial markets.

This time seven days ago, every man and his dog, myself included, were mulling the fact that the FOMC looked set to race back to neutral at a rate of knots, removing policy restriction in much more rapid fashion than their G10 peers.

One solid jobs report, and seven days, later, and all of a sudden the idea of US economic exceptionalism is back in vogue, with participants, per the OIS curve, even casting some doubt on the idea that the FOMC will deliver 2x 25bp cuts at each of the remaining meetings this year.

I’m of the view that they will, however the frenzied nature of sentiment at the moment, and elevated vol seen in reaction to key datapoints, is symptomatic of an FOMC that are either unwilling or unable to give concrete forward guidance on the future policy path. While data-dependency is the order of the day, expect markets to remain highly sensitive to incoming economic releases. This ‘flying blind’ school of central banking is a brave new world, but one we’re all going to have to get used to.

In any case, September’s jobs report was undeniably strong - +254k jobs added during the month, above the top-end of the forecast range; unemployment falling 0.1pp to 4.1%, even on unchanged 62.7% participation; and, earnings pressures remaining in check with MoM earnings growth unchanged at 0.4% for the second straight month. Goldilocks, anyone?

As expected, it proved a case of ‘good news is good news’ in terms of the equity reaction to the jobs report, with the S&P and Nasdaq both ending Friday around 1% higher. Participants continue to focus not on the potential policy implications of any data, but rather on the macroeconomic story that incoming figures are narrating. On this front, the jobs report pointed to an unexpectedly strong employment situation, which should keep consumer spending underpinned, and leaves a soft landing still on the cards.

The greenback also advanced on Friday, with the dollar index (DXY) extending its recent winning run into a fifth straight day, as the DXY broke north of 102.50. All other G10s lost ground, with the buck ably assisted by sizeable selling pressure across a flatter Treasury curve, with 2s rising as much as 15bp to a 3.85% high, amid the aforementioned hawkish repricing of Fed policy expectations.

Of course, sentiment and conviction are still somewhat capped by ongoing tensions in the Middle East, with today marking the tragic 1-year anniversary of the initial breakout of the Israel-Gaza war. Participants remain on tenterhooks, awaiting a potential and likely Israeli retaliation to the Iranian missile barrage launched last week, with crude continuing to price a chunky geopolitical risk premium amid ongoing concerns that such a retaliation could include a strike on Iranian oil infrastructure.

Only time will tell on that front, of course, though so long as geopolitical tensions continue to simmer, conviction among equity bulls may be a little lower than usual, with many preferring to take trades over a shorter time horizon, making risk management somewhat easier, particularly ahead of the start of Q3 earnings season later this week.

Look Ahead – The docket today is almost entirely devoid of major economic releases, with this morning’s eurozone retail sales the only figure of note, and almost certain not to be market-moving.

A busy slate of central bank speakers awaits, though, with 4 each from the FOMC and ECB. All are likely to stick to the recent ‘script’ of data-dependency, though comments from Fed officials on Friday’s jobs report will be of interest.

Given the quiet docket, a more subdued start to the week could prove to be the order of the day, regional events in the Middle East permitting, of course.