The outcome of today’s NFP report is likely to be ‘binary’: Citi

Investing.com — The period of calm following the volatility observed in early August may soon come to a close with the release of the highly awaited nonfarm payrolls (NFP) report on Friday.

Citi strategists anticipate that the report’s outcome will be “binary.” A disappointing figure could reignite concerns about a hard landing for the economy, whereas a robust report might allow the market to attribute July’s underperformance to temporary factors like weather, thus reinforcing expectations for a soft landing.

The bank forecasts an increase in the unemployment rate to 4.3% and job creation around 125,000, a figure that they believe could justify a 50 basis point cut from the Federal Reserve.

In their analysis leading up to the report, Citi has zeroed in on the asymmetry in market positioning. Both equity and fixed-income positions have been declining; however, the bank asserts that many investors continue to prepare for a soft landing, with a notable overweight in equities.

Conversely, there is also a significant inclination toward an aggressive easing cycle by the Federal Reserve, as indicated by their substantial exposure to fixed income (excluding Japan), particularly in U.S. Treasuries. Consensus positions seem to include long equities and a long U.S. dollar, as highlighted by the bank.

According to strategists, “Long equity positioning is vulnerable to hard-landing fears.” However, the likelihood of an aggressive easing cycle combined with duration overweights suggests that a rally stemming from hard-landing concerns could be pronounced but also limited by a steepening bias.

Regionally, U.S. equities remain the most favored, while investors are maintaining short positions in China and Eurostoxx.

In the realm of precious metals, notably gold and silver, there seems to be an overextension, and energy positioning has now shifted to the short side.

Citi strategists noted that a weak set of NFP numbers would likely elicit a market reaction similar to that seen in August. Although a repeat shock may have a diminished effect, markets have already built in much of the initial response, leaving them susceptible to unfavorable news from the NFP report.

The market repercussions in August were significant, affecting global equities—especially in Japan—widening credit spreads, causing a spike in U.S. Treasuries and Japanese Government Bonds, and leading to a depreciation of the yen. In subsequent weeks, notable recoveries have been observed in credit markets and the volatility index.