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MARKETS

Following another booming jobs report, albeit with a bag of mixed details and a bit of everything for everyone, bears and bulls alike. The S&P 500 and Nasdaq Composite retreated on Friday after Nvidia's (NVDA) incredible run came to an inevitable and screeching halt.

Nvidia faced its most significant decline in 15 months, and in follow-the-leader fashion, driving an afternoon downturn in tech stocks as investors processed the details of Friday's tricky-to-interpret jobs report.

Shares of the leading chip maker at one point dropped over 6 %—a notable walloping, marking its most significant percentage decline since December 27, 2022, when it fell by 7.1%.

From an investor's viewpoint, owning a heavily subscribed single stock, such as Nvidia, particularly in the context of nearing a psychological milestone like the $1000 per share mark amid a 75 % year-to-date rally, requires an acute alignment with the company's profit forecasts and the surrounding macroeconomic conditions for a confident breakthrough. While retreating from the summit climb doesn’t necessarily indicate that the longer-term upside potential is exhausted, it does imply that enthusiasm has possibly exceeded reasonable levels, signalling that it may be time for profit-taking.

The recent broader market gains have heavily relied on a few mega-cap stocks. As a result, any negative news surrounding one of these critical players can trigger a broader pullback across the entire Meg Tech and index spectrum.

Heading into the Payroll Report, we calculated several key permutations and combinations to send equities tumbling and the dollar higher, but none actually happened. Infact, at one point heading into the weekend, the market was once again pricing in approximately 100 basis points of Fed cuts for this year, translating to four quarter-point reductions. It's worth recalling that as of late last month, pricing for 2024 had nearly converged to the 75 basis points indicated by the December dot plot.

And while bears have faced frustration with each flip of the coin in economic data dynamics, bulls were seeking incontrovertibly convincing evidence of a slowdown in the NFP, which doesn't quite echo with a booming 275,000 headline print.

The significant downward revisions, weak wages, and rising unemployment suggest that things may not be as rosy as the headline indicated, especially following a series of weak leading indicators indicating a slowdown, which is not lost on me. But we are talking trading, not economics. I have spent all my working life on one hot seat or another; in those alpha-generating propositions, nothing ever goes by the economic textbook, hence why most interbank traders ignore house economists. Now, if only business TV would do the same !!!

The aim is for a gradual cooling across all metrics, allowing the Fed the persuasive data it needs to begin cuts from mid-year. Any development that brings the first cut forward to May would likely be bearish, potentially signalling a recession or a systematic plumbing malfunction. Similarly, if the first cut is delayed beyond June or July, it could also be bearish, indicating stubborn inflation and evidence of overheating.

A tricky balancing act, you say? Of course, it is, especially when the market is trading at record tops; absolutely perfect data and rate symmetry are needed to break fresher ground when the froth comes off the top.

ECONOMICS 101

The economy is indeed slowing down, but it continues to grow comfortably above its potential pace. This sustained growth significantly prevents excess labour demand and consequent wage pressures from easing.

Payroll employment expanded by a robust 275,000 in February, surpassing consensus expectations by 75,000. However, there were downward revisions totalling 167,000 for the prior months. Despite this, the underlying trend indicates resilience in the job market. Over the past three months, average payroll growth was 265,000, compared to 231,000 over the previous six months.

The labour market is complex and subject to various dynamics. We anticipate that these dynamics will gradually align themselves in a particular direction as momentum wanes over the next few months. The critical question remains: Will wage pressures ease before June arrives?

OIL MARKETS

Oil prices closed 1% lower on Friday and experienced even steeper weekly declines. Market sentiment remained cautious due to concerns about soft demand from China despite the decision by the OPEC+ producer group to extend supply cuts.

US economic data is softening, which is not great for oil demand; on the other hand, the market is very confident about a June cut. , which should keep the macro bears honest.

The quietening of oil price volatility persisted this week despite positive trade data from China and strong demand for oil in India. However, the market remained cautious due to a continued build-up in US crude inventories.

Price discovery is akin to slogging through a quagmire, but we remain skeptical of OPEC extending voluntary cuts with US production soaring. Even if they do announce an extension, compliance could be the issue. As usual, there is nothing bullish from our end.

FOREX MARKETS

According to four sources familiar with their perspectives, a rising contingent of Bank of Japan policymakers is considering discontinuing negative interest rates this month, driven by expectations of substantial pay raises during this year's annual wage negotiations.

However, an imminent policy shift is far from certain, as there is no unanimity within the nine-member board regarding whether to make this move at the upcoming March 18-19 meeting or to postpone it until at least the subsequent meeting on April 25-26, these sources note.

Next week, the focus should be on Japan's revised fourth-quarter 2023 GDP release and the preliminary Shunto results from the annual wage negotiations. The initial flash GDP data for the fourth quarter indicated a disappointing 0.1% quarter-on-quarter contraction (seasonally adjusted), tipping the economy into a technical recession. However, with updated activity data for December showing better-than-expected performance, there's anticipation that quarterly growth will be revised upward to 0.3% QoQ (sa). This revision could bolster the Bank of Japan's confidence in the economic recovery.

If the fourth-quarter GDP surpasses market expectations and the preliminary Shunto results indicate more substantial outcomes compared to the previous year, speculation about a March policy shift may reemerge in the market. However, we maintain the view that a 10 pb hike is possible in March, but April is a more suitable timeframe for the Bank of Japan to adjust its policy settings by a 20 bp hike.

Unless next week's Japanese data warrants, I don’t see much of a trade down here, as it could be a bit headline-whippy.

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