255k…nicely done! Given the volatility of the last two prints and moderately positive employment data in July, I expected a “hum ho” number, in line with consensus. 255k “feels” good and the market’s appears to have returned to a “good news is good news” psychology. That’s positive for risk assets in the immediate term.
Going into the NFP print, I was long $AAPL calls, short /CL and short $JPYUSD (strong Yen). On the back of the NFP number and average hourly earnings beats, I reversed my $JPYUSD to net long $JPYUSD (weak Yen). Remember, it’s the expectation of rate hikes not the hikes, themselves that moves USD trends. Given recent FedSpeak, a solid month of better than expected US econ data, and this morning’s employment report, expectations for a hike should rise. As such, we should see temporary weakness return to the Yen. All that said, there’s not too much additional room for expectations to continue to rise. Pre-NFP, Fed Funds were pricing in an 88% chance of a 25bps hike in Sept. At the moment, that’s fallen to 82% and a 50bps hike in Sept has risen 4bps to 16%. Markets now see the likelihood of two hikes by year end higher by 6bps to 40%.
I don’t see the odds of a second hike by year end rising higher than 50% before the Sept FOMC meeting. As such, I think the potential for a rise in expectations and ensuing strength of the USD into the Sept FOMC meeting are capped.
I’ve come around to the idea that Yellen will not raise rates before the election. I believe she views her role as Chair as encompassing an equality of outcomes mandate. I don’t believe Fed policy can impact such things, but I believe she thinks it can. As such, Chair Sisyphus will always find a reason not to hike. Per usual, we’ll see the FedSpeak walk back hike expectations, oil prices and China will likely cause some discomfort and the Fed will balk, again in September.
I plan to ride this recent optimism through staying long $APPL calls, continuing to short /CL and staying long $JPYUSD into Tuesdayish. At that point, I think risk/reward will favor no hike in September, and it will be time to reverse my current positions in preparation for another trend reversal.