NFG Partners SA

No long rambling post today ahead of what is the most eagerly anticipated NFP for a number for years, as markets brace for the beginning of the Fed's cutting cycle later this month. Simply to say that, in this context, the outcome today is somewhat binary: - An in line headline number, with unemployment unchanged = 25bps - Large downside surprise in headline and/or an uptick in unemployment = 50bps. The "whisper number" is for a slight beat vs. consensus estimate of 165k. Our view is that a print >140k and an unemployment rate holding steady at 4.3% or below, will likely result in a 25bps cut. Good luck and happy Friday!

Today is finally Nvidia day! 👀 All eyes will be on the chipmaker as it reports earnings after the bell today —a release that has effectively turned into a macro event in itself. Following its last two earnings announcements, Nvidia’s market cap surged by $200bn. The options market is currently pricing in a 10% swing in either direction post-today's number, which translates to a potential $300bn move in either direction! Unsurprisingly, this has fuelled a surge in activity around both the 2x long and short NVDA ETFs, as noted below by Bloomberg. Given robust capital expenditures by the hyperscalers and recent strong earnings from TSMC, expectations are high for another blowout quarter from Nvidia. However, investor focus will likely be on forward guidance and any updates regarding supply chain constraints surrounding the new Blackwell chip. It's also worth noting that yesterday saw the second-lowest trading volume for the S&P 500 this year. With today's high-volatility event set against a backdrop of thin summer liquidity, it should make for an exciting end to the day 🙃

Consistent with our suggestion last week, Powell delivered a dovish message at Jackson Hole where he confirmed that rate cuts were imminent and expressed that, while he was comfortable that inflation is trending back to target, their focus is now firmly on the other side of the dual mandate - the U.S. labour market. On this point, Powell also struck a dovish tone, highlighting that the Fed’s tolerance for labour market cooling had reached its limits and any further weakening would be “unwelcome.” Powell gave little away as to the pace of cuts or indeed the final destination, re iterating that this will be dependent on incoming data. Here though, September’s FOMC will be helpful in giving us a chance to see an updated dot plot. What is abundantly clear however is that the market (like the Fed) has now firmly transitioned to being more concerned about downside risks to growth, rather than upside risks to inflation. Bottom line: Rate cuts will begin in September at a 25bps clip – barring a VERY significant downside surprise in next month’s jobs report. Given that Atlanta Fed GDPNow is tracking at ~3%, earnings for Q2 came in well and central banks still have plenty of room to ease, we would view this as mildly bullish for risk assets (noting though that starting valuations are already rich vs. historical averages) And would also push back on the market pricing of 100bps of easing before year end, given that the incoming data is softening but by no means soft.

Undoubtedly the main event for markets this week will be the 3-day annual conference at Jackson Hole, with Chair Powell set to deliver his speech on Friday. This year’s theme is "Reassessing the Effectiveness and Transmission of Monetary Policy”, which should give Powell the opportunity to lean slightly dovish given that inflation is now firmly heading in the right direction, albeit not quite at 2% target yet. As we said last week, with inflation trending lower (outside of the sticky shelter component), the main focus is now on the other side of Fed’s dual mandate, the U.S. labour market. On this, we expect Powell retain maximum optionality on whether to go 25 or 50bps at September’s FOMC meeting and we still view the most likely path to 50bps cut as another downside surprise in the next jobs number. Expect Powell to re iterate here that the Fed stand by and ready to react to any material slowdown in the data - this following Daly’s comments last week: “We've now confirmed that the labour market is slowing, and it's extremely important that we not let it slow so much that it tips into a downturn" While markets are now pricing sequential cuts at the next five fed meetings (source, Bloomberg), we still consider this as somewhat hard to justify in the current climate, without another uptick in the unemployment rate in August’s NFP number.

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U.S. CPI came in broadly in line with expectations yesterday, with only the shelter component (traditionally a lagging indicator) coming in hot. While not mission accomplished yet for the Fed, this is another indication of inflation moving in the right direction. Attention now turns to the other side of the Fed’s mandate today, the underlying strength of the economy, with both jobless claims and retail sales. A reasonable set of numbers here and the market will move to cement pricing of a 25bps cut vs. 50bps in September. We would still view the jobs market as the most important determinant for the size of any cut, and while our base case remains 25bps, another weaker than expected NFP number in September could tip the scales in favour of 50bps. Next week’s Jackson Hole symposium will also give Powell the chance lay the ground around Fed thinking here.

Today's initial jobless claims decreased by 17k to 233k in the week ended 3rd August, against consensus expectations for a more modest decrease. While high frequency data can be inherently noisy, this along with Tuesday's upside surprise in the ISM services number seems to have calmed markets after "Manic" Monday's sell off, which probably told us more about positioning and technicals (JPY carry unwind, CTA selling, thin August liquidity) than it did about the underlying health of the U.S. economy. Bottom line: the fundamental data (for now) is still consistent with an economy that's moderating but not heading for imminent recession. What we're watching next: July's CPI number: 14.08 Powell's Jackson Hole speech: 24.08 Nvidia earnings: 28.08

Downside surprise in today's NFP (114k vs. 175k est). This follows higher than expected jobless claims and a weaker than expected ISM manufacturing number. But perhaps the most significant number from today's jobs report was the unemployment rate rising to 4.3% and triggering the "Sahm Rule". The Sahm Rule: Specifically, it signals the onset of a recession when the three-month average unemployment rate rises at least 50bps above its low during the previous 12 months. It remains to be seen however if this time is different. Layoff rates are still near all time lows and the rise in the unemployment number could also just be a function of increased labour supply from the recent surge in U.S. immigration. Either way, markets now think a cut in September is a done deal, with potentially even 50bps on the table.

2s 10s is now tantalizingly close to disinverting after 2 years(!!), as traders pile into the Trump 2.0 steepener trade. As the Fed prepares to begin its cutting cycle (75% chance they go in September), lowering front end yields, a second Trump presidency would mean more tariffs, reduced immigration, and tax cuts – all of which would likely be inflationary and steepen the back end of the curve. We would also note that, irrespective of who's in the White House, neither party has indicated a willingness to raise taxes or cut spending. Consequently, persistent and large U.S. fiscal deficits will require the issuance of a substantial amount of long-dated treasuries, keeping pressure on long-dated yields.

While the predictive power of polls is not particularly strong this far out from an election, Trump’s odds have now reduced significantly from this time a week ago (70% probability to 60% today). Source: Bloomberg, PedictIT. This might be somewhat surprising given that Harris (likely nominee) hasn't polled much better than Biden vs. Trump. However, looking at her ratings in isolation here may be somewhat folly – the question is probably not how she polls against Trump but whether she can mobilise the anti-Trump vote which has remained on the fence and so far failed to fall in behind Biden.