Ahead of our full non-farm payrolls preview article due out later tonight, we have excerpted from a report by Goldman futures trader Lindsay Matcham, which breaks down the bank's top client questions going into tomorrow's jobs print.
While there is more in the full report (available to pro subs in the usual place) below we analyze the following 6 most pertinent questions:
- Why Is There So Much Focus On The Number?
- What Is Being Priced Across Assets Going Into The Number?
- What Does Goldman Expect Tomorrow?
- What’s The Macro Landscape Going Into The Number?
- What Is Recessionary Data?
- How Does The Market React To Inline/Beat or A Miss?
So without further ado...
1. Why Is There So Much Focus On The Number?
Inflation Rear View Mirror With All Eyes On Jobs
Lots of focus on tomorrow’s NFP because the macro picture facing us is one where it feels as though the inflation battle has been won with 5yr USD inflation swap forwards sitting at 2.35% and US 10 year breakevens sitting at 2.05%, with all the focus now on jobs.
As discussed previously we are now in a "bad news is bad news and good news is good news" regime; the market wants strong jobs numbers to confirm the FED haven’t had a misstep.
Market Nervousness / Yield Curve Dis-inversion / Sahm Rule Triggered
The market is incredibly jittery on a potential hard landing outcome given how long financial conditions have remained so tight.
This is illustrative of the US2S10s inverting yesterday after 27 months which is also putting macros on edge, with the triggering of the Sahm rule also not helping. Add to this the lofty levels indexes find themselves at once more, and the positioning and leverage that is in the system.
Therefore, there will be a sigh of relief from the market tomorrow if the jobs numbers beat, because good jobs no longer equate to a move higher in inflation. Good jobs numbers now equate to Powell instigating a soft landing, and one strong jobs number can’t derail his Jackson Hole dovishness and willingness to cut.
Global inflation expectations have moved lower; UK vs EUR vs US below:
2. What Is Being Priced Across Assets Going Into The Number?
Recessionary Pricing From Bond Markets
Post JOLTS yesterday we are now pricing 4.47x cuts between now and December; that is roughly 112bps. In 2008 cuts of 50 +25 +25 were made = 100bps.
1 year OIS rates are currently pricing around 235bps of cuts over the next year; in a recession the Fed cuts 200-250 bps in the first 12m. Markets are undecided on whether Powell will go 25bps or 50 bps; 100% chance of a 25-bs cut with a 44% chance he goes 50bps.
1 year OIS rates:
Equity & Credit Markets Pricing Low Odds Of A Recession
Equities have sold off a little and the cost of SPX protection has spiked but both are pricing low odds of a recession currently. Credit markets are also not that bothered with CDX HY spreads still below 350, albeit having spiked a little. Market starts to take notice when CDX HY credit spreads move beyond 350.
3. What Does Goldman Expect Tomorrow?
The data points to watch tomorrow are non-farms and the unemployment rate at 8:30am:
- Nonfarm payroll employment, August (GS +155k, consensus +165k, last +114k)
- Unemployment rate, August (GS 4.2%, consensus 4.2%, last 4.3%)
Goldman sees a slight miss which could result in short term risk off before a recovery once the markets digests the fact that a 155k print is not recessionary – more below.
4. What’s The Macro Landscape Going Into The Number?
Currently A Bullish Risk Asset Environment With Short Term Risks
Going in to the numbers tomorrow its important to remember we are in a central bank easing, inflation moving lower and growth decelerating but not recessionary environment for now (ISM services just came inline). This is bullish risk assets in the medium to long term but in particular for US growth, the 60/40 portfolio, treasuries and gold.
JOLTS is moving lower but its not in recessionary territory:
5. What Is Recessionary Data?
NFP prints need to start moving into the 0-85k range before the market starts seriously worrying about a recession, and jobless numbers need to move up into the 400k range. Regardless of slight beats and misses tomorrow keep that in mind with regards to risk asset pricing and opportunities that arise. Important to note that recent unemployment rate increases do not signal recessions according to Goldman. Non-farms started to print sub 100k then into the 0-50k territory in 2007 before the financial crisis hit:
6. How Does The Market React To Inline/Beat or A Miss?
Inline or Beat = Risk On
In Matcham's opinion, an inline or beat in NFPs and it is equities higher, bonds lower/yields higher, USDJPY higher, and gold lower in the short term (medium/long term gold still moving higher).
An inline number means Powell is steering the market into a soft landing with inflation in the rear view mirror, and it’s going to take more than one strong jobs numbers before the market starts questioning the FED put and Powell’s 25 + 25 + 25 Jackson hole talk.
A beat and the yield curve bear steepens with cyclicals and commodities outperforming and the USD doing OK. Bull steepening resumes once the dust settles.
US 10 Year yields vs USDJPY:
Slight Miss = Risk Off With Opportunities / Large Miss = USD + Cash
The market feels very twitchy to a slight miss; so its equities and yields lower, gold sharply higher, USDJPY lower with the yield curve bull steepening. In this scenario take a step back and think about what an actual recessionary jobs number is and what opportunities that lay ahead as a result.
Goes without saying that a large miss into the sub 100k territory and its risk off with a bid to the USD, cash and gold, and the yield curve bull steepening aggressively with cyclicals and commodities bearing the brunt of the sell off.
Unemployment
A 25bps cut occurs in any scenario given how tight conditions are and how dovish Powell has been. An unemployment print higher than the last print of 4.3%, and Powell delivers 50bps in September.
The Sahm rule just got triggered, it has never failed to predict a recession and has the market on edge about jobs:
More in the full Goldman note available to pro subscribers.
