Week Ahead - Key Events
Key market events Mon 3rd Oct - Friday 7th October.
Weekly Trading Game Plan
Let's start with probably the single most important piece of information:
In the U.S. we are going to have the JOLT Job Openings on Tuesday, the ADP employment change on Wednesday, and finally the Payroll numbers on Friday. Canada and Switzerland are also reporting unemployment numbers. Why is unemployment so important right now?
- First of all, the Fed is paying a lot of attention to labor market conditions as they can be the driver of a price-wage inflation spiral.
-Secondly, once unemployment starts to rise, it is very difficult for the trend to reverse in the short term. Rising unemployment would be then a clear sign that the economy is slowing down and that's the piece of evidence the FED is looking for.
There are again several FED speakers this week. I do not believe this is going to bring us a lot of new information. We are going to have R. Bostic from the Atlanta Fed. Bostic is a non-voter until 2024. His baseline outlook is for the U.S. Central Bank to hike rates by three-quarters of a percentage point at the November Policy Meeting and by half a percentage point at the December one. On Monday, we are going to also have Barkin from the Richmond FED and Esther George from the Federal Reserve of Kansas City. Only E. George is a voter, but her mandate ends at the end of this year. On Tuesday, we are going to have Menster from the Cleveland FED. She has been a Hawk and she is a voter. Any new piece of information from her, it could be actually very significant.
Below from InTouch Capital Markets a quick Hawk/Dove analysis of the current FED officials:
To understand the overall market positioning on rates, this week's bond auctions could be vey telling. On Wednesday, we are going to have the 10y UK Gilts auction, the 15y German Bunds auction and the 10y bond auction in Canada. I believe it is worth to pay close attention to the price action pre and post auctions, as it may give some insight on actual market positioning in rates.
Last week, the bond market in the U.S struggled to aggressively sell-off in the aftermath of pretty weak treasury auctions. My impression is that, if we are going to see decent auctions in Europe, the government bond market could take a breather and rally from last week's lows.
Housing Market Data
Another important piece of information is going to come from the housing market. We are going to have a report on mortgage applications in the US and the Halifax Price Index in the UK.
House prices in both the US and the UK have so far proved to be very resilient in the face of growing economic uncertainty, however any sign of weakening market conditions could be a strong sign that monetary policy actions are now starting to bite. A key sector to watch.
Market Event Volatility
Volatility seems to be relatively rich, going into the employment event on Friday
The 10y Treasuy At the money (ATM) implied volatility is 11.93%
The 2y Treasury ATM implied volatility is 4,54%
The Eur/$ futures implied volatility is 14,4%
Despite volatilities being relatively high, actual moves ,in the event of data surprises, could well exceed the price ranges implied by the option market. Let's get ready to Rock 'n Roll.
Among Rates, Credit and Stocks, it seems to me that Rates are the asset class with the best asymmetric risk profile on the upside. The second best it is probably Credit, while currently Equities are probably the asset class with the worst risk/return profile.
Tactically, after the sharp sell-off that started at the beginning of August, betting on relief rally makes sense. But, what could it be a sensible approach to managing risk? Tactical trades, in my opinion should be managed with a stop loss. Taking the example of the 10y Treasury, a sensible stop loss level could be below last week lows in the 110 area. While the take profit level could be in the 115-116 area.
What about sizing? Let's face it, the market will rally if and only the data will be supportive. In that case, we are going to see all the asset classes rallying together. Personally, I would still feel more comfortable taking duration risk rather than credit risk. Out of an hypothetical 100$ risk budget, I would allocate two thirds of the risk in liquid Treasuries and the remaining 30% in Credit.
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