How to Trade a High-Impact US Nonfarm Payrolls Report

This is a frustrating process for markets, as the journey to price either of those factors is obviously not immediate and is a non-linear, drawn-out process, and that doesn’t reconcile well with a market that wants immediate answers and thinks in light-speed.

The result is therefore increased sensitivity to the US economic data flow and company earnings, and we’ve seen that in reaction to earnings from Microsoft and after-market from Apple and Amazon, as we have on the better-than-feared US ISM manufacturing report. The headline ISM manufacturing index coming in at 48.7 vs 47.9, with the new orders sub-component at 47.2 vs 45.0. The outcome was still a deterioration from the prior month, but not as severe as the regional PMI prints had guided to.

Positioning for a High Impact US Nonfarm Payrolls Report

The batten has now been firmly passed to today’s US nonfarm payrolls (NFP), and while the jobs numbers could be seen as somewhat stale - as the lag effect suggests US businesses are more likely to lay off workers from May onwards, the market will likely react strongly to a poor NFP outcome, as the tolerance for poor data is low.

While we did see a rise in the US weekly jobless claims (241k vs 223k last week), we haven’t seen any strong evidence of layoffs in the JOLTS report, or in the Challenger job cuts survey (at 62.7%). That said, should we see a poor NFP print in the session ahead, that will not be taken well by the USD or risk assets (equity & credit), and it would accelerate the view that the US economy is headed for tougher times. Instinctively, if US businesses read about other businesses retrenching the semantics could accelerate further job losses.

As such, a NFP print below 80k, with revisions to the two prior prints, and/or a rise in the U/E rate to 4.3%+ could set off market volatility and would go some way in forcing the Fed’s hand to cut rates at the 18 June FOMC meeting. US swaps currently imply a 7% chance of easing at next week’s FOMC meeting, with a poor NFP print likely pushing the implied pricing towards 30%, with a 25bp cut implied for the June meeting rising towards 90% (currently 62%). While we consider the bear case outcomes for markets, we also consider how markets react to an inline report, as we do the reaction to a hotter NFP print. What is clear and where there is little debate in my mind, is that bad news, despite leading to increased Fed rate cut pricing, is also bad for US equity and the USD, while likely helping stem the selling of gold. Conversely, better data will lift US 2yr Treasury yields, and see the USD and US equity push higher, with the selling in gold accelerating.

Market Reaction to the ISM Manufacturing and Earnings

The reaction in markets to the US ISM manufacturing has been fairly telling. US 2yr Treasuries sold off on the print, with yields rising from 3.55% to 3.72%, before settling out at 3.69% (+9bp of the day). The USD has found some form, with USDJPY pushing firmly above 145.00 with longs assisted by the dovish BoJ policy meeting. EURUSD settles under 1.1300 with the technical set-up looking heavy and many now looking to react aggressively if the NFP print comes hotter, and on the day, I would expect EURUSD 1-day implied vol to build rapidly as today’s session wears on. USDCHF will also be highly sensitive to moves in the US 2yr and US OIS curve, with an upside break of 0.8312 set to attract increased buying from the momentum accounts. The fact that the CHF swaps curve is now implying that the SNB take rates back into a negative setting, offers reasons to cut back on USDCHF shorts.

Trading Australia - Getting Set for the Election

AUDUSD eyes a push to the low end of its recent consolidation range of 0.6350, although the spot rate also has its eyes on the CNH (Chinese yuan) which has been the epitome of stability, with macro funds largely giving up on tactically positioning for a higher USDCNH – partly as USD longs haven’t really worked, but we’ve also seen the PBoC holding back the CNY/CNH selling flows – a seemingly prudent move, as China look to engage with the US in trade talks, while also disincentivising domestic capital outflows.

Some will consider tomorrow's Australian election and the possibility of gapping risk in the AUS200, ASX200 equity and even the AUD. If the recent polls are indeed on the money – and they were in 2022 – with the betting markets almost at the stage of early payouts (for a Labor win), there seems a low probability of any real move in Aussie assets from the election in isolation. We could feasibly see a small degree of relief in equity on the Monday re-open should the ALP indeed get a majority, as the status quo makes pricing certainty far more efficient. The risk, however, would be if the ALP get less than 68 seats, leading to a prolonged period of forming a government – with increased spending commitments and the prospect of a more dysfunctional govt leading to a small downside risk for ASX200 equity.

Apple and Amazon Lower After-market

US equity has closed higher, with the S&P500 +0.6% taking its run of higher closes to 7 straight sessions, with the NAS100 cash +1.1% and takes its outperformance from a solid move in Microsoft and Nvidia. Again, the theme was to stay long growth and high beta, although this position has been called into question ahead of NFP and after the poor reaction aftermarket to Amazon and Apple’s earnings, with both companies trading lower in response. Apple may have loosely met the sell-side consensus expectations, but one can imagine the buy-side funds were looking for more, with the view that we could have seen higher demand for Apple’s products as wholesalers and customers front-run tariffs, but we saw no evidence of that. Apple in fact, quantified the impact of tariffs, detailing that tariffs are set to add $900m in costs – that’s a lot of iPhones that need to be sold to recoup the difference or more likely prices will be going up 5%+.

We’ll see how Asia reacts today, and while China remains offline for the Labour Day holiday, we’ll see how traders’ position for a potentially highly impactful US NFP print.

Good luck to all.