Global markets were positively fazed by May jobs data, though the release turns the dollar’s pain trade a notch higher.
High side of “Symmetric”
Closely watched earnings growth was better than forecast at +0.3% month-to-month, and in-line at 2.7% on the year, suggesting orderly rather than volatile tightening demand for labour. That demand pulled the unemployment rate down by a tenth of a point to 3.8%, more than forecast. Still, Friday’s jobs data have not perceptibly moved the dial on the question of whether inflation might accelerate fast enough to force a fourth 25 basis-point rate hike this year. That seems to be the key reason why stock markets have kept the risk lever tilted to the ‘on’ position. The “symmetric” quality the Fed introduced to its inflation target at the last meeting is balanced by upside risks—like tax cuts—which have yet to feed through much to the real economy, and downside risks to growth—chiefly an unpredictable impact from deteriorating trade relations.
December hike odds rise
Yet from the perspective of fine tuning risks to equity markets, Friday’s job numbers are not strictly speaking in the positive direction. Let’s assume 2018’s second hike happens at the June meeting. Fund futures implied a 93.8% probability after Friday’s data, against 90% probability a month ago. The third move higher in the target rate this year is most likely at the FOMC’s September’s 25th-26th meeting. That would leave only December’s meeting, when a press conference and economic projections are scheduled, for another ‘normal’ policy change. Market pricing for a move on that day has merely inched up on Friday, to 47.3% implied probability from 47.1% on Thursday, 45.9% a week before and 41.5% a month ago. These odds may not yet be compelling, but they could be soon.
Just as important though is that the readings indicate parts of the market is beginning to position for a possible point in the near term when chances of a fourth hike break above even. On the one hand that should be reassuring with respect to risk, as it would suggest reduced surprise. But after equity market gyrations this year linked directly to Fed rate anxiety, anticipation of a steepening rate path will continue to be a negative for risk-seeking markets. Dollar positioning that has stayed inarguably short, looking at CFTC data, should be ranked amongst possible pain trades that participants are not positioned for as ‘perception risk’ rises. It’s worth noting a comment the new Fed chairman Jerome Powell made recently: "some investors and institutions may not be well positioned for a rise in interest rates, even one that markets broadly anticipate.” As the first outbreaks of dollar-stress appear in emerging markets, carry now more marginal and inflation-adjusted valuations still elevated, Powell’s words may come back to haunt many.
StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.