US EARLY MORNING: Index futures are a little lower and Treasury yields are around flat ahead of US jobs data

SNAPSHOT: US equity futures are trading with a slight negative bias, but the ES is maintaining the vast majority of gains seen in wake of Fed Chair Powell’s dovish remarks this week. That will be put to the test by the November jobs report – which we preview below – which will help to form expectations of what the Fed will do at its December meeting (currently, the base case is for a 50bps rate rise) and expectations of where rates will peak next year (currently, markets expect to see rates rise to 4.75-5.00% by March, where they are expected to stay until November 2023, after which the market is pricing rate cuts). Treasury yields are mixed, but are not deviating too far from neutral ahead of today’s data release, while the USD is slightly negative. Crude futures are trading a little lower ahead of Sunday’s virtual OPEC+ meeting, where the group is expected to stand pat on policy, according to recent reports; however, some are still modelling risks that the group could lower production levels.

NFP PREVIEW (13:30GMT/08:30EST): The rate of payroll additions is expected to cool once again, with analysts forecasting 200k nonfarm payrolls will be added in November (prev. 261k), while the unemployment rate is seen unchanged at 3.7%. Given that the Fed’s policymaking is currently centred around managing inflation, traders will be closely watching the wages metrics; the expectation is for wage growth to continue cooling, and this will likely form a key part of how traders will react to the data, with any upside in the wages measures likely to result in a hawkish market reaction, while any miss relative to expectations will likely incite a dovish reaction. It is worth recapping on Fed Chair Powell’s remarks on the labour market made this week: he noted that while the decline in the most recent JOLTs data was a positive, the data continued to show an imbalance between demand and supply of workers, adding that he had only seen ‘tentative’ signs of a moderation in labour demand and wage growth, and he reiterated that a moderation in both was needed to restore balance within the labour market. He argued that for now, the Fed had to assume that the balance in labour markets will be driven by the demand side. On wages, Powell noted that for most workers, increases in wages were being offset by inflation; Powell said the lack of real wage growth was “not dispositive” since people may begin demanding higher pay to make up for inflation. The Fed does not seem too concerned at this point that its brand of policy tightening will push the economy into a recession, and still think that there is a path to a softish landing without triggering a severe recession. Elsewhere, the Fed Chair was disappointed that labour force participation was not improving, and he does not think that it will return to pre-pandemic levels, though he would not rule it out. In aggregate, Powell’s remarks suggested that the Fed wants to see a substantial softening in the labour market in order to bring inflation down, and this could involve a “sustained period of below-trend growth”. Our full preview can be accessed here.

WEEKLY FLOWS: BofA weekly flows report notes the first outflows from credit (IG, HY, EM debt) in 6 weeks, the largest passive equity outflow since June, with the largest inflows into utilities since Jan 2022. BofA’s Bull & Bear Indicator jumps to 2.0 from 1.4 – highest since May 2022 on more bullish bond inflows, credit technicals, equity breadth, hedge fund positioning – which the bank says means “buy signal” for risk assets is close to an end. In terms of the 2023 themes, the bank says that the inflation shock is over; the rates shock for Wall Street is close to over so long as expectations of the Fed terminal rate stay around 5.0%, but the rates shock and the recession shock for Main Street is just beginning. Says 2023 investment themes will be global recession, China reopening, and US and European reshoring. Tail risks for 2023 are an outright hard landing and deflation. Says that ultimately the labour market will resolve the narrative; bulls need wage growth to decline sharply without big job losses, while bears worry unemployment in 2023 will be as shocking to Main Street consumer sentiment as inflation was in 2022. BofA says it is selling risk rallies from here as the market is too aggressive in front-running a negative “the pivot is here” payroll number.

DAY AHEAD: US jobs data is the highlight, and will help shape expectations for the December 14th Fed meeting, as well as traders views of where US rates will peak next year; the data itself is expected to a show a cooling in the pace of payroll additions, while traders will also be paying attention to the wages numbers for signs of how recently cooling inflation metrics is feeding into wage growth; our full preview can be found here. Before then, Eurozone producer prices data for October are expected to fallback, but remain elevated at 31.5% Y/Y vs 41.9% previously. On the speakers front, ECB Vice President de Guindos and Fed’s Barkin (non-voter) will give remarks. After the close, France will have its ratings reviewed by S&P and Moody’s, while Spain may get an update from Fitch. Our full day ahead calendar can be accessed here. NOTE: The Fed blackout window ahead of the December 14th confab will begin on December 3rd.






02 Dec 2022 - 09:20- Research Sheet- Source: Newsquawk

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