(Bloomberg) -- Elevated positioning and high uncertainty about the Federal Reserve’s rate decision is likely to trigger outsized moves for markets over payroll numbers, according to Morgan Stanley’s sales trading desk.
“Equity options are implying big moves over Friday’s payroll report,” wrote Morgan Stanley sales and trading specialists including Amanda Levenberg Goldsmith. Such pricing makes sense given “the amount of uncertainty around how much the Fed will move in two weeks is unprecedented, at least for this cycle,” they added.
Implied volatility on the S&P 500 has remained subdued compared to realized, hinting that stocks are increasingly sensitive to macro economic data. Options imply a move of 1.1% in either direction on Friday for the S&P 500, while those on ETFs tracking the Russell 2000 and Nasdaq 100 imply respective moves of 1.84% and 1.37%, the desk said.
Investors have been bracing for the non-farm payrolls monthly report on Friday to assess whether the US economy is heading for a soft landing as the Federal Reserve prepares to ease policy. Swap markets are currently pricing between 25 and 50 basis points of rate cuts at the next Fed meeting on Sept. 18.
Ahead of the report, data Thursday showed US companies added the fewest jobs since the start of 2021 while weekly jobless claims figures were below estimates.
Despite the bouts of volatility experienced in early August, exposure to US equity futures has stayed elevated among asset managers, which implies that risks are skewed to the downside in the event of a bad payroll print.
Looking at systematic macro strategy flows and positioning, an estimated $15 billion to $20 billion of equity supply is forecast for the next week, Morgan Stanley estimates. Meanwhile, the desk notes that correlation between stocks in the S&P 500 has been rising, and any further increase would suggest that long-only funds are now selling more aggressively.
“Long only positioning remains the area where exposures are most stretched,” they say.
--With assistance from Jan-Patrick Barnert.
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