The US unemployment number today is likely more crucial than the monthly change in non-farm payrolls. The most bullish scenario for risk assets is if the ratio of job openings (JOLTS) to workers seeking employment further declines without evidence of a recession. The bond market probably needs weak payrolls and a rise in the unemployment rate to fuel the rally further—a higher likelihood of a recession. Either way, the market manikins will come to life for 30 minutes once the jobs number is released.
Based on our discussions with a wide variety of market participants, we observe the following:
—There is a general bullish sentiment in the near term on risk assets; however, positioning appears closer to neutral than long/overweight. Most people wish to avoid lifting the offer near recent highs and would prefer buy the dips. Ultimately, the actions taken in the final month are unlikely to materially change a broadly poor year for the broader industry. The fear is for a bad start in 2024 and having to chase again.
—The US rates market is dominated by relative value trades rather than outright positioning. The bets on lower bond yields are more evenly balance between disinflation optimists and recession mongers. A few institutional fund managers who took the gamble of doubling down on a mistimed long USD rates view have fared well in recent weeks. We appreciate and respect those who take well-judged risks (mostly US-based) over consensus-driven momentum types. Well done; you deserve the success for persisting!
—We have little doubt that recent market price action shapes most perceptions of economic realities. By that token, it means market sentiment is also very fickle should prices revert/correct from current levels. How one sees things depends on the time horizon under consideration:
– If this period is the most recent two months, then things are looking very optimistic for the US economy and financial markets.
– When the prior 14-15 months are taken as a reference, this whole episode was just a nothing burger based on flawed or incomplete assumptions regarding the interplay between interest rates, equity valuations, and economic activity..
– Alternatively, today's market prices are reality catching up to overly optimistic investment outlooks from almost exactly two years ago.
Naturally, the sample on which we have based our conclusions may not be representative of the broader market. The points above are not mutually exclusive; it just depends on time horizons and investment mandates.
Good luck!
Updates
This is jobs number to trade after the number, rather than before, as the risks seem finely balanced and priced.
We're looking at the ratio of JOLT to unemployment. The immediate market reaction to the headline figures may be the wrong one in a couple of scenarios.
