Risk-Off Flashpoint (Now in Focus) Podcast Version
The desk anticipates a risk-off sentiment to dominate the FX landscape as labor market dynamics come into sharper focus, particularly ahead of the upcoming Non-Farm Payroll (NFP) report. Per the full note from MUFG EMEA, George Goncalves highlights the significance of labor market trends and demographics, which are likely to influence market expectations regarding Federal Reserve policy. With the NFP number expected to provide critical insights into economic health, traders should prepare for potential volatility in US fixed income and currency markets. This backdrop sets the stage for a nuanced trading environment leading up to the March Fed meeting.
What the desk is arguing
The MUFG desk flags a risk-off flashpoint centered on labor market dynamics and demographic trends, arguing that these factors could drive a more dovish Fed stance ahead of the March meeting. This implies a weaker USD environment as rate cut expectations may rise.
They emphasize the all-important NFP release on Friday as a potential catalyst, with the outcome likely to reinforce the narrative of a softening labor market. The desk implicitly rejects the view that the economy is resilient enough to keep the Fed on hold, instead betting on a deterioration that forces policy accommodation.
Where it sits in our coverage
Our consensus view aligns with this risk-off tilt, targeting EUR/USD at 1.10 by Mar26, with a wide range of 1.04-1.12 reflecting elevated uncertainty. The MUFG commentary supports our bearish USD stance, though we note that demographics are a longer-term driver not fully priced in.
While MUFG leans risk-off, several firms present a more balanced or contrarian view. For instance, BofA is more bullish USD, targeting EUR/USD at 1.04 by Mar26, contrary to our consensus. Morgan Stanley also sees USD strength, with a target of 1.06 by Mar26, aligning with BofA's contrarian stance.
Other firms like Barclays and Citi are more aligned with our bearish USD view, but with varying conviction levels. Barclays' 1.12 target is at the high end of our range, reflecting a stronger EUR risk.
01MUFG focuses on labor market weakness and demographics as key drivers for a more dovish Fed.
Market implications
Implications for FX: A soft NFP could fuel USD selling, particularly against EUR and JPY. For fixed income, lower yields may steepen curves.
Risks to this view
Upside risk to USD if NFP surprises strongly positive, negating the risk-off narrative. Demographic shifts are slow-moving and may not materialize near-term.
Welcome to the MUFG Global Markets Podcast. I'm John Cook, and I'm joined today by George Goncalves, MUFG's Head of U.S. Macro Strategy.
It's Tuesday, February 4th, 2025. Welcome back to the podcast, George. Good to be on, John.
Yeah, always good to have you. So George, in your most recently released piece entitled Risk-Off Flashpoint, now in focus, one of the key themes there was labor demographics and the impact of immigration. And I've heard this discussed, you know, among clients, colleagues.
I think it's pretty interesting, kind of what's happened up to this point, as well as how things like the Trump administration's policies could change that. But in addition to that, there's also some federal worker policies that I know you've discussed, and also the human tragedy of the wildfires in California, which could have some, presumably has some implications on employment. Why don't you take our listeners through this topic and a number of the specifics that I mentioned, and tell them how that might show up in the incoming employment data released this Friday?
Yeah, no. So I think we need to frame the discussion in two parts, and this is true for any sort of major macro topic. There's short-term versus long-term factors at play.
The short-term, you know, these adjustments that are happening potentially at the federal level, maybe there's going to be a reduction in state and local government hires if there's less aid or a more cautious stance initially until everyone figures out how the federal government's going to be operating. There's the actual potential for layoffs altogether, or attrition through some of these kind of packages that are being offered. And so, you know, in the short run, there's a lot of noise that's going to get introduced into the data.
We're not going to really see it at the upcoming January NFP release. This will be more clear, I think, in February, March, April. So we have these short-term things.
And then, of course, the tragic situation in California and the highly disruptive nature of it probably took a lot of folks offline as well. And that probably will show up as, like, hopefully as temporary unemployed, and so we'll be watching that closely. But the genesis of the piece was really to kind of take a step back and look down from high above around labor market demographics and trends between local versus immigration type flows into the country and how that's been making its way through different industries.
And what I think won't surprise many is that a lot of the new migrant workers that came through ended up in hands-on type jobs like construction, restaurant work, some of the more jobs that are in person. And those are the industries that could stand to see some impact if immigration policies are going to change going forward. And it's hard to always tell, like, chicken and egg around labor slack versus how tight each of those industries are.
But if you look at the JOLTS data, there was an improvement in less openings in those sectors, and it's hard to prove all these things, but it's possible that they were satisfied by that influx of immigration that took place. And so going forward, it could make it not as easy to fill those roles. Yeah, I mean, to be perfectly honest, I'm borderline bamboozled by all the policy changes that are potentially in play here, even just specifically with the labor market and immigration between what's happening with immigration policy and federal workers.
There's certainly more questions than answers there. But looking to move on specifically to this Friday's number, in addition to the jobs data for the month of January, which we always get the BLS, we'll also release the final revision as part of their annual benchmark process. I believe it's called the QCW, but please, please correct me.
My recollection is that earlier this year, we got a revision to the level of employment in March 2024, and then that level was down revised by 818,000. If you don't mind, remind our listeners kind of what all that was about and tell us what your view is as to what those revisions mean on Friday. Yes, and so last year, and this this is actually really an important time that when it actually took place, August of last year, we had seen weakness in the jobs data, both on the headlines and the kind of divergence between household versus the CES NFP establishment survey, something that we've been documenting for the better part of 18 months, as you know, and our listeners and readers know it's been a big driver of our macro thinking.
And it really came to a head in August when the QCW report came out with a pretty substantial and sizable revision down of over 818,000 for the time period of March 23 through March of 2024. So that annual number was revised or preliminary number was revised down by 818. You know, we we took that as a signal that the Fed, especially at the time, was starting to get concerned about the the labor market.
And that was a big driver of our 50 basis point rate cut. You know, that plus the volatility that we saw in early August left an imprint, I think, on the on the Fed. And that ended up with that big cut that we saw in September.
So that really is the genesis of what started the rate cycle. And so we're going to get the final version of that come this Friday once they crystallize the actual official numbers for that period. So it goes from not being a an estimate.
It goes to being final early indications. And there's been a couple of quarterly adjustments along the way that you can kind of piece together in our understanding from our economics team, really just that it probably gets revised up so it won't be as negative. So that's that's, you know, again, anything's possible.
Maybe the initial 818 was wrong to begin with. But we think that it's probably going to go up to like 700,000 negative. So be a slight improvement.
And but that's not the only thing that we get on Friday. We also get new seasonal factors. We get the birth death model adjustments.
And that's the one that could really stand to change because it's a five year look back, which covers the COVID time period. So that to me is going to be the real big one to see if those new weights alter on a go forward basis, how the birth death adjusts NFPs. And so it's a super important number on Friday.
We've been harping on this for a better part of the last couple of months. And I think it's it can be confusing. We're going to get the headline number on January if the revisions from March of last year through December on a post benchmark side were revised lower, that would make December lower, which then artificially might boost January.
So you might get this weird thing where January is a strong number, but it's only just because of the math. And then you get the revisions and it's maybe not as good. So it's going to be a lot to digest.
And then there's the unemployment rate. So Friday is going to be a super important day for the macro world. Certainly sounds like a lot of numbers to keep track of, for sure.
So we've I think we've we've talked about we've talked about payrolls, you know, you're supposed to look at the January number itself, you know, and keep in mind, it's just not the headline number. It's the unemployment rate. It's details, participation there, you know, wages, all those sort of things.
We're looking at revisions to the annual through via the annual annual benchmarking process. And we're also looking for adjustments to the birth death model. My guess is all that, you know, especially that latter one may not be clear, you know, right at 830.
OK, so so that's payrolls following payrolls. What should our listeners be watching for? What are the main macro factors that will affect how markets trade from now until the March FOMC meeting?
I mean, I think we had an example this past these past two weekends, it's going to be these out of the blue sort of pronouncements or new developments that we're not thinking about. We're in a very uncertain period. We got that news last two weekends ago about the deep seek on A.I. and then that caused markets to kind of get into a into a tizzy.
And then you had the tariff concerns, which were then at least postponed earlier this week. So I think all things that are in up in the air, it's going to be related around fiscal policy. The policy is coming out of the Trump administration.
I think that's going to continue to dominate until we until the dust settles and we get a better grasp of the actual details of how things are going to get implemented, notably around the the doge and the Department of Government efficiencies, like how like how are they going to cut back on spending? I think that's going to be the big focus really for the next three to six months until we get a budget and everything else in place. So as I've said, I think in many ways it's almost like you have to forget about the historical data for now and just just be forward looking and be very tactical because things are going to change real time.
Yeah, and check your social media accounts, I would add as well. So again, I would encourage our listeners to check out the latest and greatest from George and his team entitled Risk Off Flashpoint now in focus. And if you still are not receiving Georgia's strategy reports, do check out the MUFG research portal at www.MUFGResearch.com, where you can find all of your favorite MUFG research as well as sign up to have it conveniently delivered to your inbox.
Great stuff as always. Thank you, George. Thank you, John.
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