Major tremor warning sounded! Be careful of the non-farm payrolls exploding the longs tonight
Morgan Stanley experts predict that Friday's non-farm payroll report may cause significant market volatility. The current market uncertainty about the Federal Reserve's policy has reached unprecedented levels, with the expected volatility of the S&P 500 index at around 1.1%. If the August non-farm payroll growth is below 100,000, it may trigger massive selling. Bank of America strategists analyze that if the economy experiences a hard landing, the Federal Reserve may cut interest rates by 50 basis points, leading to a decline in the US dollar and oil prices
Including Amanda Levenberg Goldsmith, Morgan Stanley sales and trading experts wrote: "Stock options imply that Friday's employment report will trigger significant market changes." They added that such pricing makes sense because "the uncertainty surrounding how much action the Fed will take in the next two weeks is unprecedented, at least in this cycle."
The implied volatility of the S&P 500 index is still lower than the actual volatility, implying that the stock market is becoming increasingly sensitive to macroeconomic data. Morgan Stanley's sales and trading department pointed out that options imply that the S&P 500 index will fluctuate in either direction by 1.1% on Friday, while ETFs tracking the Russell 2000 index and the Nasdaq 100 index imply fluctuations of 1.84% and 1.37% respectively.
Investors have been preparing for Friday's non-farm payroll monthly report to assess whether the U.S. economy is heading for a soft landing as the Fed prepares to ease policy. The swap market is currently pricing in a 25 to 50 basis point rate cut at the next policy meeting by the Fed.
Morgan Stanley estimates that based on the flow of funds and positions in systematic macro strategies, the supply of U.S. stocks next week is expected to reach $15-20 billion. At the same time, the department pointed out that the correlation between S&P 500 index constituents has been increasing, indicating that funds that are only long are now more actively selling in any further uptrend.
Strategists led by Michael Hartnett wrote in a report that if August non-farm payrolls grow by less than 100,000 and the unemployment rate exceeds 4.4%, it will trigger a stock sell-off, causing the Philadelphia Semiconductor Index (covering Nvidia, Broadcom, and AMD) to fall to around 4000 points, a 16% drop from current levels.
If the employment report does show a hard landing scenario, the Fed may cut rates by 50 basis points later this month. Bank of America strategists wrote that this would cause the 10-year U.S. Treasury yield to drop from around 3.7% to 3%. Major currencies like the dollar against the yen and euro will weaken, and oil prices will plummet from around $70 per barrel to around $60 per barrel.
In contrast, "perfect" employment data of 150,000 to 175,000 will indicate a soft landing for the economy, reversing the recent trend of defensive stocks outperforming the market, benefiting tech and energy stocks.
Nvidia's stock price has risen 116% year-to-date, riding a roller coaster in recent months and becoming a key driver of the S&P 500 index. Besides concerns about economic growth, traders are also worried that the artificial intelligence frenzy driving Nvidia's rise may be overblown