A softer payroll data, so long as it does not fall off a cliff triggering a recessionary lash back, could re-engage all the favorite trades of the year. Not least, it would provide the most critical evidence to date to suggest that the market's rates pricing is more in line with reality than the Fed's own more subtly hawkish higher for longer signaling.
CHINA
While valuations have done most of the heavy lifting so far, growth throughput to the earnings channel will need to carry the baton, so if you believe China's growth will return to the semblance of a pre-pandemic trend, best to remain overweight on China equities.
China equities will offer a bigger bang for the buck than FX, but the street is waiting for a better entry level. The better news flow out of China resulted in 50% rallies in the HSI and HSCEI over the last three months. While the medium-term trend is probably an easy decision, positioning feels stretched relative to the soggy PMI prints, so there will be a better entry point later in 1Q once the hard data fails to inspire. China's retail crowd savings splurge will drive the next leg up in equities as FOMO kicks in; hence we prefer the A share as opposed to the offshore market as we advance.
Besides looking for an entry point on mainland stocks, global investors are waiting for the expected broad dollar weakness on positive global macro data and a slower pace of Fed hikes to follow through. In particular, in Asia, local investors are looking for USDCNY to move 6.65 as proof in the pudding of improving China's growth, which would be a clear signal that China equities are green-lighted again.
The rally in the US on the soft-landing outlook has likely stifled flows into Asia as DM recession risks have recently moderated with better-than-expected 4Q GDP in the US and Euro area.
THE TRADE
On an NFP miss, we should see higher equities driven by lower bond yields, but given the EURUSD has struggled for traction above 1.1000, short USDJPY would be the preferred trade to roll the dice on this view.
On the other hand, a beat will be messy as it could counter the current broader trends. We have short sterling as the hedge from yesterday's Asia open and looking at adding on any beat. In addition, short CAD and JPY would be the best expressions to hedge a beat on the NFP and even trade that side post-event.