The financial markets are already trading in the midst of poor summer liquidity, creating more volatility and upset. Traders and analysts note that the market is jittery, with nervous trading patterns already showing. The options market does appear to be a little too cocky at the moment. That’s why we are worried a gotcha moment could arrive with the release of important economic signals, especially inflation.
All these changes leave the market environment quite fragile. None would likely create as much commotion as the next U.S. payroll report, due to be released next Friday, November 3. A bad jobs report could cause the algorithms to overreact, making the already-dicey situation even worse. Similarly, analysts note that the average implied earnings-day move for tech stocks has fallen to a 20-year low of a measly 4.7%. This drop is reflected in increasing investor confidence.
This is a dicey predicament for Federal Reserve Chair Jerome Powell. Pervasive inflation and a challenging economic growth landscape are making his monetary policy calculus all the more difficult. The situation gets doubly hard when, like now, former President Donald Trump calls for rate cuts on social media. These external factors complicate Powell’s task of driving the economy even further.
The bond market underscores this uncertainty as well, with the 30-year bond yield remaining stubbornly near 5.00%. This degree of yield is so high that an incremental step in the bond market can be dramatic, changing the direction of investor sentiment in a heartbeat. Before the market volatility of April kicked yields up to around 4.52%, highlighting just how much the landscape has shifted.
Market participants are nervously anxious for the next payroll report. After a Q1 that was doggedly weak at best, they’re even more concerned that a bad Q2 number could be the last straw. Traders are worried about the new tariff regime which will come into effect from August 1. They think that’s not entirely discounted into the market, which could set up for a surprise positive reaction.
As July comes to a close, flow desks start to increase their claims precaution classification. In response, they urge traders to remain cautious amid this period of heightened volatility. The confluence of these factors has produced an environment in which even the faintest payroll miss can set off a risk-off death spiral. Some investors are getting nervous. With one more piece of economic data, the market will re-price the dynamics in an instant.