Hedge against a hot payrolls report

Investing.com – Investors should consider hedging the possibility of a hot nonfarm payrolls figure later in the week, according to Bank of America Securities, as this report offers the potential for substantial volatility.

The number has regained its crown as the most important data release for stocks, analysts at BOA Securities, said in a note dated Sept. 2, with now less sensitive to CPI data than at any other point post-Covid, and the payrolls report now the bigger source of volatility.

The second print of second quarter U.S. GDP growth surprised to the upside at a robust 3.0% q/q seasonally adjusted, led by strong consumption growth of 2.9%, while most other major categories were marked down. Nevertheless, the consumer is nearly 70% of the economy. 

Concerns about the labor market can be eased when the economy sees 2.9% spending growth, as strong spending indicates the labor market probably held up fine in the second quarter and solid demand should still generate some job growth going forward.

“The economy continues to disprove skeptics,” BoA said. “Growth has certainly cooled relative to last year, but it has done so at a gradual pace. July personal spending data further confirmed this view, picking up a solid 0.5% m/m in nominal terms.”

“Overall, recent data indicate another step in the right direction, and all eyes will be on the August payrolls report.”

Into the print, Fed funds futures are pricing in a “recession-sized” 100bps of cuts for the rest of 2024. 

Equities seem more excited about the cuts than concerned about a potential recession, gauging by their return to near highs and the outperformance of small caps & equal-weighted S&P. 

“If that’s true, the main risk for equities this week is a hot NFP that reprices short-term rates higher,” BoA added. “The most direct way to hedge this risk is through equity-rates hybrids.”