/STIR: Markets Delicately Poised Into NFPs, Cleaner Two-Way Risk Noted

The recent run of generally disappointing U.S. economic activity data, along with the lack of meaningful upside surprises in the April CPI and PCE readings, has allowed FOMC-dated OIS to move off hawkish cycle extremes.

• FOMC-dated OIS shows just below 50bp of cuts through ’24, after threatening the 25bp level on a couple occasions since late April.
• Zooming further out, the contract still operates comfortably off levels seen in early April, when ~75bp of ’24 cuts were priced.
• Higher-for-longer Fedspeak and the general trend in early ’24 economic data has driven a meaningful moderation in pricing of ’24 cuts during H124.
• Still, the first 25bp Fed cut is more than fully discounted through the November FOMC, with ~80% odds of a cut through the end of the Sep FOMC showing.
• We also note that yesterday’s sizeable long building in SFRM4 could come under pressure if we see a strong report.
• Tsy positioning is similar, with shorts in futures (curve-wide) pared from extremes and J.P.Morgan’s all client Tsy survey showing the longest reading since late March
• However, neutral positioning in that survey is still elevated, providing scope to add positions in either direction.
• The active client portion of the JPM survey has a skew towards net long positioning, meaning a firmer-than-expected release could trigger some pressure on those accounts.
• We also note that Tsy yields trade towards the lower end of the ranges witnessed since early April.
• On net, recent market moves, coupled with accompanying positioning dynamics (longs set and shorts cut), provides a better two-way risk backdrop into today’s NFP release (compared to prevailing dynamics seen a few weeks ago).
• The fact that we are in the pre-FOMC blackout period and given that the data will provide a key input into Federal Reserve policymakers’ deliberations at the June 11-12 meeting, provides the potential for an amplified market reaction if we get a notably soft or strong report.
• Revisions and the potential for mixed data dynamics present the risk of an initial volatile reaction to the data, before greater clarity is sought in the details.
• Our full NFP preview can be found here.