Learn to Trade – Macro Overview 6th August
Focus on the Non-Farm Payrolls and Equities, Bonds and USD
Today may be a crucial NFP number with regards to the upcoming FOMC meeting on Tuesday. Fears of a slowdown of growth in the US have resulted in the USD selling off broadly against most major pairs, including low yielders such as the Yen, and a slide in US treasury yields. Most of these market movements have emanated from a belief that the FOMC will act to ease monetary policy further at the next meeting. This helps to explain why the equity indices have remained strong despite the disappointing data. Once again, distortion on the headline NFP number means that the private payrolls data may be the major focus of attention for the market.
Thoughts from the trading floor
As far as market reactions are concerned, the upcoming FOMC meeting throws in new variables to the tail risks associated with the number. Firstly, we would expect the bond markets and the USD to trend with the direction of the number. That is a weak number should see bond markets rally and the USD to weaken. These moves may be accentuated with Tuesday in mind. A strong number on the other hand should see an extended drop in bond prices and a strong rally in the USD as participants are forced to scale back their expectations of major Fed moves on Tuesday. These markets should see the most substantial moves. Equity indices remain tricky to call, as a weak number may lead participants to eventually buy on the back of possible Fed action. Most interestingly a strong number may then elicit a contrarian reaction, especially if it is established that the recent drive higher in equities over the last week has been mainly on hope of Fed action. However if the number is strong enough it would also mean that the economy is performing well. Thus the number to be careful about would be a number strong enough to prevent the Fed from easing policy but not strong enough to settle the debate that the economy is growing at a healthy rate, i.e. keep the Fed in a wait and see stance until the meeting after next. A number such as this may see equity markets reverse course after an initial rally.
Bull View
Equity bulls will want a significantly strong number if they are to set the market into a good short to medium term uptrend. A bad number may see equities trade higher; however this rally would be fragile and built on hope. Bond bulls will obviously be looking for a weak number. This may serve to propel the 10yr. T-notes below the 2.8% yield mark.
Bear View
Equity bears will hope that if the number is weak, the market cannot sustain the recent bid activity on the back of hope that the Fed will act, however they may get some joy out of an in between number as discussed above. Bond bears will look for a very strong number.
Futex View
The greatest impact on the market would be a very strong number as we believe that this will elicit a very strong negative reaction for bonds and positive for the USD. As far as risk/reward is concerned, we would prefer a strong number.
Tags: bear, bull, FOMC, futex, NFP, Non-Farm Payrolls, USD, Yen
