Options suggest that non-farm payrolls will create a huge wave in the stock market. Bank of America warns that if the data shows a hard landing scenario, the consequences will be very serious...
Morgan Stanley's sales and trading department stated that the high level of uncertainty surrounding positions and the Fed's interest rate decisions could lead to significant market volatility in response to employment data.
Morgan Stanley sales and trading experts, including Amanda Levenberg Goldsmith, wrote: "Stock options indicate that Friday's employment report will cause significant market changes." They added that such pricing makes sense because the uncertainty about 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 a 1.1% movement in either direction for the S&P 500 index on Friday, while ETFs tracking the Russell 2000 index and the Nasdaq 100 index also imply movements of 1.84% and 1.37% respectively.
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The implied volatility of the S&P 500 index is lower than the actual volatility.
Investors have been preparing for Friday's non-farm payroll report to assess whether, as the Fed prepares to ease policy, the U.S. economy is heading for a soft landing. The forward market is currently pricing in a 25 to 50 basis point cut at the next policy meeting of the Fed.
Prior to this, Thursday's data showed that U.S. companies added the fewest jobs since the beginning of 2021, while weekly jobless claims were lower than expected.
Despite several rounds of volatility in early August, asset management companies still have a high exposure to U.S. stock futures, which means that if the employment data is poor, the risk will lean towards the downside.
Morgan Stanley estimates that the supply of US stocks next week is expected to reach 15 billion to 20 billion US dollars, based on the flow of funds and positions in systemic macro strategies. At the same time, the department points out that the correlation between the constituents of the S&P 500 index has been increasing, and any further upward trend indicates that funds that only have long positions are now more actively selling off.
"The long positions remain the riskiest place," they said.
Strategists at Bank of America warned that if Friday's US employment data shows that the world's largest economy is heading for a hard landing, semiconductor stocks, including Nvidia, will face a difficult journey.
Strategists led by Michael Hartnett wrote in a report that if August non-farm payroll growth is below 0.1 million and the unemployment rate exceeds 4.4%, it will trigger a sell-off in the stock market, causing the PHLX Semiconductor Index (which includes Nvidia, Broadcom, and AMD) to fall to around 4000 points, a 16% decline from its current level.
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Bank of America's expectations for the PHLX Semiconductor Index in the scenario of hard landing in employment data
If the employment report does show a hard landing scenario, the Federal Reserve may cut interest rates by 50 basis points later this month. Bank of America strategists wrote that this would lower the yield on 10-year US Treasury bonds from the current level of around 3.7% to 3%. Major currencies such as the US dollar against the yen and euro will weaken, and oil prices will plunge from around $70 per barrel to around $60 per barrel.
In contrast, "perfect" employment data of 0.15 million to 0.175 million people will indicate an economic soft landing and reverse the trend of defensive stocks outperforming the overall market in the near term, benefiting technology and energy stocks.
Nvidia's stock price has risen 116% year-to-date and has been on a roller coaster ride in recent months, becoming a key driver of the S&P 500 index. In addition to concerns about economic growth, traders are also worried that the hype surrounding artificial intelligence, which is driving Nvidia's rise, may be excessive.