2024.10.07 Weekly
DATA REVIEW
A very strong jobs report with 254k jobs added versus 140k expected while prior month figures (dashed) also saw an upward revision. The big increase was driven by private sector jobs which added 223k versus 125k expected and the ~100k per month over June July and August.
The Unemployment rate fell to 4.1% and below the expectation to remain unchanged at 4.2% from the last month. Labour force participation rate being unchanged since July is also a plus.
With such a strong jobs report and the upward revisions, I did wonder if one-off seasonal adjustments played a part, or whether the adjustments may have been politically charged as some made out to be. Looking at the change in job postings on Indeed however, I think we can put those conspiracy theories to rest — the swings higher in both total and new job postings into September is consistent with the big increase.
Also consistent with the strong jobs report is the fall in Unemployment claims that would have looked much steeper if it weren’t for the seasonal adjustments.
Looking at wage growth, AHE grew 0.4% (0.37% unrounded) above 0.3% expected but below 0.5% (0.46%) in the prior month. The year-on-year rate increased to the highest in 4-months to 4.0% versus expectations of 3.8% which was also accompanied by an upward revision to the prior month from 3.8% to 3.9%. With the 3-month annualised rate back to the fastest pace since the start of the year at 4.3%, there could be fresh upside risks to sticky-inflation should the reacceleration over Q3 continue in the coming months.
ISM PMI marked a 3rd expansionary month for the services economy at a much greater pace from 51.4 and 51.5 in prior months, to 54.9 which was above the 51.7 expected. Business activity and New orders saw a hue expansion, Prices paid also increased. Employment dipped into contraction again but details show it is not as bad as the 48.1 reading might suggest — negative responses outweighed by just a small margin with a steadying broader trend, while the report highlights “Employees leaving, and it’s tough to find new ones; Head count, open positions and employee retention is about the same month over month” comments from respondents.
Looking at the other components, big jump in Inventory growth expectations supports the increases in Activity, New export orders and Imports, while Supplier deliveries was slower along with a tick up in Backlog of orders.
GEOPOL
The strong US jobs data and ISM services report, the latter of which saw a slight increase in supply chain tightness, comes at an interesting time when the Global supply chain is coming under pressure again and Geopolitical risks rising— GSCPI’s latest reading came in a touch softer on the prior month but broader trend into positive territory is concerning. Meanwhile tensions in the middle east have escalated further after Iran fired ballistic missiles at Israel in retaliation for the Lebanon airstrikes, increased tensions is likely to keep Oil and logistical premiums high and should continue to be felt in global supply chains. While there is probably a high-bar for much larger supply-chain disruptions, geopolitical risks could get much dice-ier over the coming 4–6 weeks with US elections kicking off.
David Woo had an excellent video on this covering the angles:
“Geopol risks will rise as we approach US election as Ukraine and Iran have as much stake in the November election as the Democratic party, neither of which would like to see a 2nd Trump term”
“With SPX just below its all-time high, I think the risk premium in the market is too low. There are many questions but what is very clear is that the transition from Biden to the next presidency is fraught with risks. This is why I remain long the October VIX contract.”
EQUITIES
SPX was relatively unchanged adding just 0.22% for the week after trading in the red until the Friday jobs report.
SPX being near all-time high is making the VIX look a little weak against the high level of geopolitcal uncertainties. The SDEX and TDEX however does reflects those concerns by investors with SDEX continuing to grind highr to its highest level in almost 18-months.
Put-call ratio is exceptionally high while implied volatility is somewhat low for near-term SPX options.
Looking at the strikes for those expiries above, there is a good chunk of itm-calls likely to get monetized this week, especially if we assume a furter rally would get increasingly difficult against geopol uncertainties. That could help draw the index towards 5,600.
Global equities ex-US index beginning to look a little tired again, bearish inside week with a 13 count, and weekly RSI not looking so supportive. Developed market index EAFE and Emerging ex-China weeklies are showing clearer reversal price action.
China equities stunning ‘stimulus’ rally continued and HSI is pushing on to start the week today. RSI flashing overbought while around some ‘tech’ levels but none of that means anything with this kind of price action.
China is clearly the black sheep in the equities space and I continue to look tactically short SPX for the 4–6 weeks ahead and look to cover my remaining long NDX runners from the August and September lows this week.
COMMODITIES
Bloomberg commodities continues its good run but resurfacing USD strength has helped to slow the rally. Last week finished with a daily reversal bar and RSI is peeling off from extreme overbought.
Energy (Red) looking strong while Precious (Yellow) and Industrial (Orange) metals looks ready to pullback.
Interestingly, Dalian Iron ore has produced a long-wicked rejection of the attempt to recover the trendline, and
Copper continues its ‘rolling-over’ price action with strong supply found in the 50–61.8fib region.
We’ve seen a big recovery move in yields to which precious metals tends to buckle against, even if the sell-off proves temporary which it also tends to do when catching up with rate moves. I would prefer short Silver over Gold in this respect with geopolitical risk premiums potentially holding them up. But it may be that the US yield view + Geopol premium is just a stronger case to buy Gold with a pro-USD bias, like long XAUEUR…
Looking closer at Brent Crude, I’ve been trading around long ideas for a retracement back to $80 since Brent breached below the $70 handle which has worked out well while stacking up some smaller runners, but have gone flat, somewhat regrettably, after Iran’s missile barrage had ended on Wednesday.
While unlikely there will be any meaningful stoppages to production, I think it will continue to hold a high geopol risk premium and can easily see it overshoot the big psychological 80 handle. I also see a lot of commentary that the impact from rising Crude prices will be limited, but I’m of the opinion that the macro risks this presents its hugely understated as it dents consumer spending and corporate profits should higher prices persist, even if doesn’t rally too much higher from current levels.
RATES
Yields (from 2yr outwards) are now higher than it was at the beginning of September after the huge move last week — 2yr +36.7bps, 5yr +30bps and 10yr +21.9bps.
I see very underappreciated upside risks to inflation looking at the developing macro data and Oil price risks. Short-term US inflation swaps (1yr Orange, 2yr Purple) rebounded very strongly over the past month and Dec24 (Green) and Dec25 (Red) SOFR’s have woken up to the idea that terminal rates are looking like it could be much higher.
For much of the past year we’ve seen a strong inverse correlation via bad news being good news for equities — i.e. more rate cuts priced in (top panel trends lower) equities rally (bottom panel QQQ/ACWI ratio higher). More recently we’ve seen a positive correlation between the 2 as the market weighed up the risks of the labour market slowing down too quickly.
But if the economy is running stronger much like we saw at the beginning of the year and inflation risks are appearing again (US economic surprise index n Orange, vs 2 and 10yr yield) I’m not so sure we’ve turned the ‘Good news is no longer Bad news’ corner as its likely to lead to higher neutral and terminal rates.
CURRENCIES
FX vol is back, and so will King Dollar…
I won’t bother going through the FX price charts this week with the turn well underway for USD but will instead focus on this FX volatility chart for EURUSD (Orange), GBPUSD (Green), and AUDUSD (Purple). Within a couple of weeks, we have seen 1month vols accelerate higher, while risk reversals continue to rollover in favour of the Dollar.
While I’m not entirely sure how the US election is going to play for the USD, I do think it will continue to be a winner under more market volatility due to strong US economic strength on a relative-value basis and the very positive FX carry.
Still continue to hold that book. Was going to cover USD longs if NFP came in weak, but we got a monster beat and I’ve got plenty of room to hold and assess as we approach elections.
LOOKING AHEAD
CPI and PPI the main data releases. Elsewhere we have Employment data from Japan, and RBNZ rate decision, Europe and Swiss CPI, OPEC convening, as well as Central bank speakers throughout the week. While US earnings season kicks off, TSLA’s Robotaxi launch and AMD‘;’s AI-event this week should get some attention.
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Thats all for now. Good luck trading!
