Fed: Jobs report raises ‘risk of higher incremental hikes,’ strategist says

BNP Paribas Equities Derivatives Strategist Max Grinacoff joins Yahoo Finance Live to discuss what the July jobs report means for the Fed, market volatility, and corporate stock buybacks.

Video Transcript

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- We have got futures pointing to a lower open. And after, we got that much better than an estimated jobs report this morning. Joining us now with reaction is Max Grinacoff, BNP Paribas Equities Derivative Strategist.

Max, thanks for being here. So first of all, as we look at this reaction, how are people setting up ahead of this? Clearly, this was a surprise for everyone, including market participants.

MAX GRINACOFF: Yeah. And thanks for having me again. So pretty gangbusters [INAUDIBLE] for July, over double what was surveyed, revisions hired in June numbers as well.

So while we've been saying the Fed is well priced, the data really remains more pertinent than ever. And there is certainly a risk of higher incremental hikes at the September FOMC which is sort of what you're seeing reflected in the S&P price action this morning, this sort of good is bad mentality if you will.

But in our economists view, it does corroborate a bit that we are not in a recession. And keep in mind, we do also get CPI data this upcoming Wednesday.

Forecast suggesting we have seen the peak in inflation. And if we do, in fact, see that peak in inflation, we could also see the trough in consumer sentiment, particularly with the labor market data still clearly so strong.

- Max, do you think this report is so strong and that it suggests maybe we'll get a 75 basis point rate hike that the market needs to sell off. We need a big adjustment here, and maybe that happens this month.

MAX GRINACOFF: Yeah, so look, we came into the start of the year saying you will see jitters around this Fed hiking cycle, especially as the Fed hiking cycle started to clearly get priced in more aggressively as inflation continued to surprise to the upside.

But when we look on our desk at, for example, positioning in the discretionary space via CFTC data, ETF flows, systematic data like volatility control strategies or CTAs, and then in opposite markets flows, so call option volumes, put option volumes, along with anecdotal evidence that we've had through investor and client conversations, investors are and have been well positioned in terms of hedging their downside risk for the better part of the year.

And in fact, while we have seen these tactical bear market rallies as sentiment kind of improves, again, anecdotal evidence points to investors are actually using these tactical upside opportunities to kind of roll and re-strike hedges.

So with positioning so clean and so defensive, in terms of the data and the metrics that we look at, it's hard to see this sort of explosion to the downside in terms of where we sit right now.

- Interesting. And I know you've been watching the VIX as a reflection of all of this as well. And you said in a note before the report that you expect the VIX to remain rangebound through the next FOMC meeting. Did anything you see today change that view?

MAX GRINACOFF: Yeah. Yeah, if anything, it sort of corroborates my view, which I'm certainly happy about. I think the vol market has been even more interesting than the spa market in our view. You know, VIX has unsurprisingly seen some compression in recent weeks but has remained relatively rangebound for sort of the better part of the last six weeks or so.

That has driven the, not to get too crazy, the volatility of volatility to three year lows which I think has caught some investors off guard. So we do sort of see scope for this rangeboundness, if you will, to continue on VIX spot.

We're calling between 20 to 30, at least through September FOMC. And again, as investors remain very positioned defensively, we think that range holds at least through the end of September.

- In the note you sent over, you showed a really good stock buyback chart. Buybacks, by and large, despite the economy slowing down, they have remained pretty strong. And I think a lot of investors have only known the last decade of strong stock buybacks by and large.

But what we're hearing down in DC, with that 1% tax on buybacks, how big a headwind is that to future stock buybacks? Because the way I think about it, it could be a headwind to markets.

MAX GRINACOFF: Yeah, that's a great question. I think, certainly, something to monitor and watch in the coming quarters. But I think, post the core of Q2 earnings season, especially from a lot of the tech heavyweights, the growth heavyweights, you're seeing announced buybacks at decade plus highs. Right?

So again, in talking in terms of positioning, we've been calling it sort of the return of the corporate put, especially as the Fed put has all but diminished. So we do think, at least in the coming months and quarters, this acceleration of announced buybacks will provide some support as the corporations themselves act as a sort of marginal buyer for their own stocks essentially.

- Max Grinacoff, BNP Paribas Equities Derivatives Strategist. Have a great weekend. Appreciate you coming on.

MAX GRINACOFF: Thank you. You too.