Jefferies analysts raised alarms about the potential for market turmoil if upcoming inflation data deviates from expectations.
The firm explains in its note to clients that the recent volatility stems from a combination of weak economic data, geopolitical uncertainties, and central bank actions, compounded by stretched positioning in equity futures.
“To pin the blame for this risk-off price action on one single factor would be highly disingenuous,” Jefferies notes, highlighting the interplay of multiple stressors.
The pivotal factor appears to be payroll data, which acted as the “proverbial straw that broke the carry-trade camel’s back.” The subsequent massive flight-to-safety trade has left investors questioning how much further the market will fall.
However, “no one knows the answer to that question,” Jefferies asserts, emphasizing the unpredictability of the current market environment.
Central to Jefferies’ outlook is the upcoming Consumer Price Index (CPI) print.
The analysts warn, “A 0.3 or above on core will be a complete mess in markets as the Fed put is questioned. Rates will not protect risk.”
Conversely, they believe that a lower-than-expected CPI could calm the markets or even trigger a significant rally if it signals super-sized Fed rate cuts.
Jefferies expresses confidence in their risk parity position, bolstered by the belief that the Fed has reestablished its safety net for the markets.
They note that their blues (blue-chip stocks) have provided substantial protection, hedging about 70% of recent losses. However, they caution that a resurgence in inflation could undermine the Fed’s ability to act, posing a significant risk.
The analysts conclude that if the data justifies faster Fed action, a base case of 25 basis points cuts, possibly combined with a halt to quantitative tightening, could be the Fed’s strategy. They remain optimistic about their current positioning, ready to adapt as the market evolves.