Goldman Sachs: Post NFP thoughts (10/04/2024)
What Was The Market Reaction?
Market Wanted An Inline/Beat
With inflation out the way the market wanted good data to confirm the soft landing narrative. Good news is good news, bad news is bad news for now and markets reacted accordingly; equites higher, yields higher as cuts got priced out, with curves bear flattening. Credit spreads tigher, gold and the cost of SPX protection lower.
Long duration names (Housing -1.57% and CRE -0.49%) are now muting the equity rally as yields stay elevated.
The USD is sharply higher (less cuts being priced) resulting in technicals being broken across currencies including USDCNH, USDJPY, AUDUSD, EURUSD.
US2S10S bear flattened as cuts got priced out in the front of the curve, equities rallied on strong non-recessionary data and the USD strengthened:
What Is Now Being Priced?
50 + 25 to 25 + 25 : Front Of The Curve Looks Correctly Priced Now, Opportunities Further Along The Curve
2.6x cuts priced were priced between now and December going into the number = 65bps so just under 50 +25. This was pretty bearish in my opinion; another significant slowdown in jobs was needed for Powell to give us another x50 at a meeting and that slowdown into jobs would have tipped us into recessionary jobs data.
As I write we are now pricing 2.2x which feels inline; roughly 25x in November and 25x in December.
Going into the number 1 year OIS rates were pricing 174bps over the next year vs at time of writing circa 160bps.
This is no longer in recessionary territory where we were at going into the 5th September meeting 235bps of cuts over the next year.
2.2x cuts not between now and December:
What Macro Regime Are We In And What Are The Opportunities?
Still Bullish Risk Assets
Stepping back we are in a growth positive (all be it slowing), non-recessionary, central bank easing, inflation moving lower environment which is bullish risk assets. In fact it’s very unusual that global coordinated banks act in this fashion with global growth holding up so well. This is bullish risk assets but in particular for US growth, the 60/40 portfolio, treasuries and gold.
Post the number the world is not ending, recession is seemingly not around the corner and as long as inflation is still looking like its on its way to target the FED will slowly cut towards the market implied neutral rate of circa 3%. O
pportunity To Re-engage In Steepeners
The opportunities in US rates has probably been juiced for now given we were priced too bearishly going into the print, however the bear flattening that has occurred is an opportunity to re-engage in steepeners; remember in a heathy economy where central banks are cutting the curve will be steepen and certainly won’t be inverted so take the opportunity as we approach 0 or invert again.
US2S10S flattening post the number:
FED Pricing vs Market Pricing Still Way Off
Important to remember the current disconnect between market pricing and the FED. The FED upped their market implied neutral rate to 2.875% at the last meeting and market pricing is currently 3.28% post the number so let’s call it 3%.
As per the dots the FED believe we hit neutral at the end of 2026 vs the OIS swaps and rates markets telling us we hit neutral at the end of 2025. Post the number the market is still telling the FED they are behind the curve somewhat and there are still opportunities to fade these cuts next year via SRFZ4Z5 if you are now siding with the FEDs projections:
Z4Z5 pricing:
Equity Themes We Like Into Year End: Republican Outperform
Feels to me that the market has become complacent with regards to a Trump election. His odds are back up to 48% and our republican outperform basket is well off the highs. Below from Louis Miller:
We think our Republican Policy Outperformers (GS24REPL) basket has symmetry to the election outcome (currently being cheap to polls) and think it could be +8% higher if Trump wins the presidential election and his PredictIt odds of winning go up to 100%. We are only 33 days away from election day this theme should matter more and more.
We like the following option structures on our Republican Policy Outperform basket (GS24REPL):
Costs 1.65% to go long 2-months 105% 113% call spread
Costs 35bps to go long 2-months 105% (22v) 113% (20v) call spread and short 92% put (27v)
Trump’s election odds are back up to 48%
UK Is Still Too Hawkishly Priced
Never ceases to amaze me and even after today’s print we have 95bps of cuts over the next year vs the UKs 82.5bps. Over the next year there are 147bps of US cuts priced vs UK cuts of 121. Over the last 20 years US forward rates were on average priced above UK vs today where they are lower. Our economists are expecting a faster and deeper BoE cutting cycle than the market is pricing, we remain constructive the UK long-end here
Get/Stay Long Japanese Equities
USDJPY making moves prior to the NFP number hitting the tape after Ishiba’s dovish comments earlier this week “not in an environment now to raise rates again”. Historically a hawk he has been doving, re-igniting the carry trade and bidding up equities painfully aware of what happened in August. He has effectively closed the door on his historically hawkish stance which is bullish USDJPY and equities moving forward into the end of the year.
Nikkei vs USDJPY
Buy China Dips
I outlined in my note here why the China news was such a big deal. Although fiscal is on the way it is important to remember though that we haven’t received any details of it yet and this is reflective in the Chinese forward rates where the curve is still inverted.
Rate cuts are useless in a balance sheet recession (cutting rates doesn’t force people/companies to borrow, lever up and spend again), capital injections are OK because banks with more capital are more likely to lend to the real economy but what we really need is fiscal.
Given the US election is in November XI will probably wait until that is passed before announcing fiscal details on the basis that a Trump victory may require him to do more fiscal than was previously thought given potential tariffs.
That is quite far out and the market may test China’s fiscal resolve in the interim. Use this opportunity to buy the dip.
The USD should continue to strengthen from here and I believe China will need to de-value their currency (as they did in 2015) as part of their stimulus package so long USDCNH also makes sense here.
Max loss on options is premium paid.
Max loss on futures can be unlimited.
All references to "we/us/our" refer to the views and observations of the desk.
This is not a product of GS Research and as such may differ slightly from published views.
Good luck.
Many thanks
Lindsay Matcham
Futures Sales Trading
Sources for charts: Bloomberg as of 04/10/2024; past performance is not indicative of future results.