Protect yourself against a hot pay report

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

The number regained its crown as the most important data release for equities, analysts at BOA Securities said in a note on September 2, now less sensitive to CPI data than at any time post-Covid, and the wage report now the biggest source of volatility.

The second print US GDP growth surprised in the second quarter at a robust 3.0% q/q seasonally adjusted, led by strong consumption growth of 2.9%, while most other major categories were reduced. However, the consumer represents almost 70% of the economy.

Concerns about the labor market may be eased when the economy shows spending growth of 2.9%, as strong spending indicates that the labor market likely held up well in the second quarter, and solid demand should continue to generate some job growth.

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

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

In print, Fed funds futures are betting on a “recession-sized” 100bp cut for the rest of 2024.

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

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