In the first quarter of 2025, New Zealand’s manufacturing sales rose by 2.4%, improving from a previous increase of just 1.1%.
In the last quarter, sales had actually dropped by 1.2%. However, the sales volume for dairy and meat products jumped by 4.1%.
This new data shows that key manufacturing sectors are gaining strength. The shift from a decline to solid growth, especially in dairy and meat, indicates a positive trend in the primary industry. This is a notable change from last year when low global commodity demand and weak local orders hurt sales. Now, production is aligning more closely with typical seasonal patterns.
The 2.4% increase in total manufacturing sales is more than twice the 1.1% gain from the previous quarter. Although overall figures can mask variations, the strong performance from food processing is clear. Patel highlighted that the dairy sector’s input procurement is typically reactive, which suggests that demand for feed, transport, and packaging will continue to rise into early winter.
With this context, pricing trends are already starting to show the effects of increased production. Costs for raw materials, which have been stable over the past year, might soon influence wholesale and distribution prices. This affects how hedging strategies are viewed for commodity-linked investments.
A key highlight is the 4.1% increase in dairy and meat sales volumes. These sectors, sensitive to global supply chains and local labor conditions, are bouncing back. Liu noted that better weather and stronger-than-expected export orders in February and March have contributed to this recovery. This factor is also impacting weekly volume contracts for related investments, as traders adjust their expectations for margins in the second quarter.
Currently, the market seems less willing to accept sudden drops in agricultural outputs, as attitudes shift toward expecting moderate stability in volumes. This adjustment alters short-term risks for food and producer price-related investments. Since early April, order flow data shows a trend toward longer-term strategies.
These changes call for careful attention to regional survey data, including upcoming PMIs and monthly production figures. The gap between weaker indicators and actual sales data is narrowing, allowing for more accurate modeling. However, short-term strategies may need to be flexible to account for possible volatility ahead of RBNZ updates or new export reports.
Overall, the manufacturing output outlook is more stable than at the end of last year. Larger companies are aligning their second-half predictions with these strong first-quarter results. The current put/call ratios reflect a more cautious approach, but the shift away from declining sales is significant and should not be ignored.
Traders in Tokyo and Beijing are preparing for a busy week filled with important data updates. Key events on the Asia-Pacific economic calendar include New Zealand’s Q1 manufacturing sales at 22:45 GMT and various Japanese economic indicators about an hour later.
At 23:50 GMT, Japan will share bank lending data for May, current-account balances for April, and the final Q1 GDP figures with all revisions. China will publish its May consumer price index (CPI) and producer price index (PPI) at 01:30 GMT, followed by trade balance statistics at 02:00 GMT.
Release Highlights
Japan’s reserve assets for May will be revealed at 03:00 GMT. It’s important to note that Australia is celebrating the King’s Birthday, which will reduce AUD liquidity during this period. You can find more details in the complete economic calendar.
This week provides plenty of insights for those tracking short-term rates, especially in Asia. The upcoming data releases will impact implied volatility and expected forward yields, which require close attention.
Starting late Monday GMT, New Zealand’s Q1 manufacturing sales will provide insights into industrial output and overall business activity. While often overlooked, this data has become more significant due to its influence on Reserve Bank policy expectations. Shortly after, Japanese data will be released, offering multiple insights. May’s lending figures may reveal trends in risk appetite and banking sector strength, while the current account data will highlight trade flow resilience and income balance.
The revised GDP print will be particularly important. It provides the final assessment of Q1 output, and any significant changes in private investment or consumption could affect expectations regarding monetary policy and future guidance from the central bank. This should be treated with care, similar to initial estimates.
Next, China’s inflation data will arrive just as global markets open. The CPI and PPI figures will provide immediate insights into domestic demand and price stability, both crucial for assessing commodity pressures and margin risks. These releases often lead to sharp market reactions, especially when combined with trade data.
Impact Analysis
The trade balance data is especially relevant for those managing regional exposure risks. A rise in exports, particularly if supported by gains across key trading partners, may indicate strong external demand despite challenging conditions in developed markets. On the other hand, a widening trade surplus might raise speculation about foreign exchange intervention.
Shortly after, Japan’s reserve asset disclosures will complete the early session. These reports focus less on volume and more on allocation trends. Past changes in securities holdings or reserve composition have shown to affect currency correlations quickly.
A practical consideration is the reduced AUD liquidity on Monday due to Australia’s King’s Birthday. This creates thinner markets and potentially wider spreads, particularly for AUD pairs or those with tighter risk parameters. Traders should prepare for erratic movements and adjust exposure with tighter stops and modified notional sizes.
Moving forward, the goal is to monitor surprises against consensus and connect them to realized rates. Pay attention to how futures for local tenors react to the CPI and GDP data, then evaluate these responses alongside options volatility. We aim to act where curve steepeners or flatteners seem mispriced based on policy path re-evaluation.
Steady traders should adjust deltas gradually rather than making quick, sweeping changes. The busy calendar this week provides clarity that can help narrow forecasting errors and enhance activity around critical points in the curve. As always, the data comes with contextual reactions that we analyze through policy probability and pricing dislocation.
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Jamie Dimon recently shared his thoughts on the bond market. He noted a ‘crack’ during COVID-19 and highlighted that US government debt has risen by $10 trillion since then. He predicts there will be another crack in the bond market, which could lead to panic, but he feels his organization will handle it well.
Dimon mentioned that changes to rules and regulations may be needed but did not specify when this crack might occur—whether in six months or six years. He observed that lessons from early COVID-19 events, when yields jumped just before the Federal Reserve began unlimited Quantitative Easing, may not have been learned.
After ‘Liberation Day,’ yields increased by 70 basis points before stabilizing. The current strategy appears to involve selling bonds first. If this becomes widespread, it could put added pressure on bonds during any future market turmoil.
Dimon’s comments highlight his ongoing worries about fragility in the bond market and reflect a broader trend we’ve seen since the pandemic. Government debt has increased, and the markets have absorbed it—so far—without major issues. However, this calm could change if stress returns.
When Dimon refers to “another crack,” it’s serious. The earlier crack during the COVID-19 panic showed that Treasury markets stumbled not because of economic failure but due to structural pressures. There were no buyers amid the chaos, and yields soared until the Federal Reserve intervened with strong measures. This emergency liquidity was effective, but only for a while.
Dimon’s vague timeframe—six months or six years—suggests that it’s not the exact timing that matters but rather the possibility of instability re-emerging once monetary and fiscal supports fade or get tested. When everyone tries to exit the market simultaneously, even stable markets can falter.
The 70 basis point yield rise after ‘Liberation Day’—when markets were thought to be normalizing—was not irrational. It reflected how investor confidence relies on central bank actions. Bonds were quickly sold, prices dropped, and yields responded. Selling first and asking questions later may work again, creating a self-reinforcing cycle.
For those of us using derivatives in these markets, we shouldn’t assume that recent calm guarantees stability. The memory of rapid market changes should stay with us. Large institutions may quickly sell assets if volatility spikes, and this alters how volatility spreads through the market.
Don’t think that high government debt alone will create problems. Issues arise when confidence in the value or liquidity of those bonds is tested—be it by inflation, a sudden change in foreign demand, or policy errors. Any trigger doesn’t have to be dramatic.
There’s also the risk that regulation, which Dimon hinted at but didn’t elaborate on, might take time to adapt. If the market faces stress and there aren’t sufficient preparations, tactical positioning will be crucial, even more so than policies under discussion. Markets don’t wait for legislative clarity.
In this environment, we should focus on shorter time frames and careful positioning. Using tail hedges might be beneficial when fear is undervalued. When mispricing occurs, it tends to happen suddenly.
We’re not predicting panic. But when experienced banking leaders speak about past liquidity events in stark terms, traders should pay attention. If their expectations change, it usually signals the start of a phase where untested assumptions about liquidity, spreads, and correlations begin to shift.
Those assumptions, if ignored for too long, often snap back with the most force. Preparation isn’t about predicting the future but positioning for unexpected events that don’t announce themselves.
Next week, attention will turn to several important economic reports. We will see the US CPI report, China’s inflation and trade data, and the UK’s jobs, GDP, and spending review. Equity traders will also keep an eye on Apple’s Worldwide Developers Conference (WWDC).
On Monday, China’s inflation data is expected to show an annual CPI drop to -0.2% from -0.1%, with a month-on-month figure holding steady at -0.1%. The previous data indicated a 0.1% year-on-year decline, highlighting ongoing deflation due to lower domestic demand and high US tariffs affecting manufacturing.
Also on Monday, China’s trade surplus is projected to grow to USD 101.3 billion from USD 96.18 billion. Exports are expected to rise by 5%, while imports may decrease by 0.9%. In April, exports increased by 8.1%, and imports saw a minor drop of 0.2%.
Apple’s WWDC kicks off on Monday and will reveal updates across various platforms, despite challenges like tariffs and AI development. Anticipated updates include enhancements for iOS, macOS, and new hardware features.
On Tuesday, the UK jobs report is expected to show a slight unemployment increase to 4.6%, while wage growth is predicted to remain at 5.5%. Previous reports indicated a slow down in job growth and a minor cooling in wages.
The US CPI report on Wednesday is forecasted to show a +0.2% rise for the month, with the core rate increasing to +0.3%. Analysts are particularly interested in how tariffs may affect consumer prices after the rises seen in April.
Thursday’s UK GDP data is anticipated to reveal a -0.1% contraction for April, after a previous growth of 0.2%. This trend is likely influenced by earlier tariff actions, affecting production decisions.
Next week is packed with significant data that will influence short-term pricing in key markets. With inflation figures from major economies, relevant USD trade balance from Asia, and insights from the UK’s economic activities, the reaction across futures and options markets may be quite pronounced.
China’s CPI release is likely to confirm the weakness in domestic demand. Even with a small annual decline expected, ongoing monthly deflation shows a lack of pricing pressure in consumer-heavy sectors. Combined with ongoing restrictions in global supply and less demand for inputs, manufacturers are passing on fewer costs or even lowering final prices. We anticipate that the softness in China’s CPI will impact pricing for industrial metals and equities linked to trade.
The trade balance data from China adds another layer. Predictions indicate a robust surplus near USD 101 billion. The export sector seems to be holding up, supported by low base effects, while internal buying remains weak. This situation suggests that domestic supply chains are still struggling, but international buyers continue to source actively despite policy tensions. This could lead to volatility in products linked to global freight, showing potential mismatches between expectations and reality.
We are also closely monitoring Apple’s WWDC—not only for product launches but for the wider sector implications. Cook’s team has hinted at several AI-related updates, and associated semiconductor stocks are priced for greater swings than previous events. This could create opportunities for intraday trading or calendar spreads for tech investors.
Over in the UK, Wallace’s wage and employment data arrives Tuesday morning, potentially affecting short-term gilt and FTSE contracts. While unemployment trends upwards, steady earnings indicate inflation pressures are still present in the service sector. This scenario makes a June or August base rate cut less appealing to policymakers. Any gaps between official figures and market expectations could lead to significant movements in interest rate derivatives.
Midweek, all eyes will be on the US inflation figures. Consumer price growth is a key factor affecting broader index movements, especially for sectors sensitive to interest rates like consumer discretionary and tech. Powell has emphasized that externally sourced costs, like tariffs, play a crucial role now more than ever. This influences perceptions of the Fed’s approach and the volatility seen in rate derivatives heading into Q3. If the core CPI rises by another 0.3%, especially driven by durable goods or services, we could see a brief spike in volatility as FOMC outlooks are reassessed.
Finally, we’ll be watching the UK’s GDP report on Thursday, focusing on the growth stall in April. This small contraction highlights concerns that construction and manufacturing sectors still feel the effects of last year’s decline. Early quarter tariffs might have affected input choices and delayed export deliveries. This softness may lead to steadier pricing for forwards and lower revision risks through summer, suggesting that flat curves in sterling assets could persist for a while.
Overall, the week ahead presents tightly grouped data across multiple time zones. We will focus on how forward-looking markets adjust based on actual performance. By remaining responsive to both headline and detailed shifts, there are opportunities to capture gains, particularly in cross-asset positioning.
The foreign exchange trading week has started quietly, with small changes in the market. Eamonn is away for the King’s Birthday holiday in Australia, and reports indicate that the fluctuations are minimal.
Bitcoin rose around $2,000 over the weekend, reaching $106,400. This increase is seen as a good sign for risk-related assets.
Subtle Market Influences
While trading began calmly this week, it’s important not to overlook the small changes happening beneath the surface. Although early currency markets appear stable, subtle shifts can affect price movements. The spot markets may not be experiencing significant action, but derivative pricing suggests that traders are beginning to form clearer views — especially since volatility has decreased recently.
For instance, Bitcoin’s weekend gain signifies growing confidence in risk-prone assets. A $2,000 rise to $106,400 can change market sentiment by Monday, especially after traditional markets have closed. Futures and options linked to cryptocurrencies reflect this optimism, showing tighter bid-ask spreads and more traders writing downside protection, indicating that they are getting ready for stability or further price increases.
Liu mentioned that delays in macro data and a muted interest rate outlook contributed to bond markets not creating important currency differences. Instead of being a barrier, this serves as an opportunity. When implied rates stabilize, FX options become cheaper, particularly for currency pairs linked to data-sensitive economies.
Thompson pointed out that traders might be underestimating this week’s data releases, but hedging patterns tell a different story. Skews on one-week tenors in various G10 currency pairs have increased, showing a demand for upward protection. We saw similar behavior when energy prices rose recently. Such patterns often reflect sensitivity to global inflation rather than immediate actions from central banks.
Nguyen’s perspective on regional flows aligns with the latest CFTC positioning data. The length in the US dollar has declined slightly, but not enough to indicate a significant shift. Dealers are reducing their leveraged long positions, especially in the dollar-yen pair. This decline is not just mechanical but also behavioral, as that pair felt heavy last week despite supportive Treasury yields.
Volatility and Risk Pricing
Regarding volatility, the three-month implied volatility remains low, but recent crypto pricing dynamics indicate an increased willingness to take risks. Times when implied volatility lags behind historical levels can provide affordable chances for risk exposure. This is the second time in two months that Bitcoin has surged during relatively quiet periods elsewhere, with correlation matrices supporting this trend.
Additionally, we’ve noticed a sharp rise in demand for AUD downside hedges. This increase isn’t solely influenced by price movements; it also stems from unmet expectations around commodity data. Traders are preparing for unexpected outcomes that aren’t fully reflected in the market.
On the flip side, short-term equity options are showing little movement in pricing, which is unlikely to last. A temporary calm without new flows rarely lasts. We expect corrections, not necessarily in direction but in implied pricing, which could also impact FX if there’s a shift in risk pricing.
At present, the pricing direction suggests a moderate inclination towards risk, but protection is becoming cheaper in stagnant areas of the volatility market. This mix typically doesn’t hold; when it changes, it tends to happen quickly.
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The USD/JPY pair ended the week up by 133 pips, reaching 144.85. This rise has led to doubts about how long this upward trend in US yields and USD/JPY can continue.
Concerns exist about the potential negative effects on the US economy from trade disruptions and policy uncertainties, which might impact USD/JPY. Services like eFX Plus provide trading ideas and offer subscription options: a basic plan for $79 per month and a premium plan for $109 per month, with a limited-time 7-day free trial.
Market Trends and Expectations
Last week saw a strong move in the USD/JPY pair, rising 133 pips to 144.85. However, many traders are now questioning the sustainability of this trend. The increase reflects the ongoing demand for the dollar, supported by rising US Treasury yields. Still, as these yields come under closer examination—especially with signs of economic slowdown—focus is shifting from continuation to sustainability.
The short-term market environment is changing. Expectations of slower growth in the US and uncertainty from policy decisions are likely to affect risk attitudes and currency exposure. These concerns are real; weak economic data, trade tensions, and political changes can all limit the momentum behind trades sensitive to interest rates, such as long USD/JPY positions.
Traders should have noticed how the USD/JPY pair relies heavily on interest rate differentials. While this relationship remains, its stability may decrease if new information alters predictions about future rate decisions. This is where things may become complicated.
Positioning and Strategy
For those trading derivatives in this currency pair, the initial reaction might be to stay with the trend a bit longer. However, beyond just price action, positioning and implied volatility tell a different story. It’s crucial to watch if risk reversals and option skews start indicating a greater demand for downside protection—when this begins to widen, it often signals a change in market sentiment.
Kurosawa’s earlier observations about policy uncertainty are particularly significant here. As this issue lingers, many traders are adjusting their positions, particularly on the edges of the forward curve. This suggests it’s wise to keep delta lean and gamma neutral, especially with upcoming economic reports on the horizon.
If Jackson’s yield projections are correct—meaning rate expectations stay high into the next quarter—the dollar may have another chance to rise. Conversely, any disappointing labour market or inflation data could reverse this trend quickly. These instances make skews and tails more crucial than mere chart levels.
Currently, we’re focusing on short-term options—weekly and one-month contracts—for better flexibility and lower exposure to headline risks. We have observed that demand for bullish USD/JPY strikes has leveled off, suggesting some traders are not convinced of another significant move up without a new catalyst.
To navigate what might be a more volatile period, adjusting volatility surfaces and recalibrating delta exposure may be beneficial. We prefer to remain reactive rather than predictive in the short term, closely monitoring the spread between realized and implied volatility in JPY pairs. When this spread starts to change, it often signals an already underway shift.
We are also keeping an eye on key threshold levels. If the pair stays above 145.00 leading into the next rate decision, it could prompt policy discussions that may impact the market. However, if it falls below 144.00, it could indicate a lack of confidence, potentially triggering quick exits by short-term traders.
For the time being, strategies that balance directional and volatility approaches seem most appropriate. This means favoring straddles or risk reversals over direct bets. Flexibility will be key in distinguishing between defensive and reactive trades as market conditions evolve rapidly.
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Bank of England rate-setter Megan Greene has shared her thoughts on the ongoing drop in inflation. She believes that the recent rise in inflation is due to temporary factors and expects it to return to target levels in the medium term.
Greene points out that while there’s a tendency to ignore current inflation levels, there are risks. One concern is that people might spend less, even if interest rates go down.
She also predicts that trade fragmentation will lower inflation in the UK and suggests there could be different policy directions in the future.
Currently, the market predicts that the Bank of England will reduce interest rates by 38 basis points by the end of the year.
Greene’s comments highlight that short spikes in inflation are not seen as signs of a long-term trend. Instead, central bank officials are focused on larger factors that are likely to push inflation back towards target levels over time. These “one-off” factors—like fluctuating energy prices or seasonal variations—are recognized but do not lead to aggressive policy changes. This cautious approach signals that rate-setters are avoiding overreaction to short-term changes.
This suggests a careful balancing act. If inflation is viewed as temporary, there will likely be a stable approach instead of sudden rate cuts or hikes. However, Greene raises an important issue: households may not react consistently, even when borrowing costs are lower. Factors like consumer confidence, sentiment, or job market concerns could make people hesitate to spend, even with better borrowing conditions.
Greene also points out a more significant shift. Disrupted global trade is becoming a force that keeps prices down. For traders focused on interest rate probabilities, this makes the outlook clearer: over time, lower inflation supported by trade changes may lead to modest or declining interest rates.
When Greene talks about policy divergence, she means that not all central banks will act the same way. This is crucial because it suggests that the interest rate paths of major economies may begin to vary. We shouldn’t expect the Bank of England to follow the same timing or scale as the Fed or the ECB. This gives us more flexibility, but it also adds complexity.
Currently, futures markets indicate a slight easing, with just under 40 basis points expected by year-end. This doesn’t suggest urgency; it corresponds with a central bank that is aware but not overly concerned. For us, this means we need to pay close attention to data. Labor metrics and core inflation indicators will be more important in predicting short-term price movements than geopolitical events or wage reports.
We should be alert for any changes in forward guidance from policy officials, as this could hint at future timing or sequence. For now, Greene’s position suggests we should exercise patience and closely monitor developments rather than engage in speculative optimism or panic. For those managing varying exposure across durations, a flatter interest rate curve may form if policies remain steady amid reducing inflation. Expect gradual alignment with target levels, focusing on the path rather than the speed.
**Increased Non-Farm Payrolls and Signs of Economic Confidence**
Walmart is seeing steady consumer activity, and the White House has no plans for a call between Trump and Musk. Meanwhile, Fed’s Harker mentioned that rate cuts could be on the table later this year.
In the markets, gold fell by $40 to $3,313, US 10-year yields rose by 11 basis points to 4.50%, and WTI crude oil increased by $1.28 to $64.65. The S&P 500 gained 1.1%, while the USD strengthened and the JPY weakened.
The market reacted positively to the non-farm payrolls, showing some underlying tension leading up to their release. Good news about US-China trade likely influenced this sentiment.
After the jobs report, Fed funds pricing for April 2026 dropped by 10 basis points to 70 basis points, which boosted the dollar. The USD/JPY approached peak levels for the week, while the dollar made modest gains of 25-35 pips across the board.
## Recent Employment Data in Focus
Recent employment data from the US and Canada were better than expected. The US non-farm payrolls rose by 139,000 in April, exceeding the expectation by about 9,000 jobs, lifting cautious sentiment into a more confident outlook. Similarly, Canada saw a surprising increase of 8,800 jobs in May when a decrease was anticipated, giving local markets something to react to.
Harker’s comments about possible interest rate cuts later this year carry more weight now, especially as the US 10-year note yield rose above 4.50%. Typically, such a rise would dampen dovish speculation, but instead, it highlighted a gap between current bond market conditions and future projections. The drop in Fed funds pricing for April 2026 to 70 basis points suggested a shift in expectations that was hard to ignore—not just for immediate reactions, but also for where money is expected to be two years from now.
The increase in USD/JPY towards weekly highs showed strong buying right after the payrolls were released. This wasn’t a broad dollar rally, but it indicated where buyers were most focused. The dollar index saw gains of 25 to 35 pips that were steady yet measured, reflecting a cautious risk appetite. This is understandable as equity strength was selective; the S&P 500 rose by 1.1%, but gold decreased by $40 to $3,313, and oil went up by $1.28 to $64.65, likely driven by internal supply and demand factors rather than speculative actions.
Company news and geopolitical developments influenced market flows. Potential trade talks between American and Chinese representatives in London added to the sentiment that fundamentals might change ahead of key data. With China issuing rare earth licenses, seen as a move towards cooperation with major automakers, there was more momentum following the payroll report.
## Market Response to Economic Indicators
Currently, we are witnessing a reset, with traders reducing holdings where prices had become extreme before data surprises. For those focused on rates or volatility, the collective message from bonds, currencies, and oil is clear: while short-term surprises drive immediate moves, longer-term contracts are beginning to price in a different outlook for the latter half of the year. Given recent trends, we expect changes in dollar funding and implied rates to be significant for traders with medium-duration strategies.
What’s important now is to monitor the strength of buying in USD assets beyond the initial reaction. The employment data has recalibrated expectations rather than thrilling them. If the dollar continues to attract demand based on moderate surprises, particularly against currencies with more passive central banks, the trade may still hold despite cautious sentiment.
It’s this clarity in transactions, along with subtle adjustments in forward rates, that should provide the best insight into current liquidity positioning. While we haven’t seen a sharp reversal, conviction is not stagnant. It’s evolving, as it typically does when the market is caught slightly off guard.
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The latest Canadian employment report shows the job market is weakening gradually. Canada gained 8,800 jobs, which is a bit better than the expected decrease of 12,500 jobs. However, the unemployment rate rose to 7.0% from 6.9%.
Certain sectors, like manufacturing and transportation & warehousing, are struggling. However, growth in other areas is offsetting this decline. If this trend continues, the Bank of Canada may cut rates in July to help the economy.
Gradual Increase in Unemployment
The data indicates that the economy is stable for now, but it’s not performing at its full potential. Unemployment is slowly rising and is expected to continue increasing later this year. Positive changes regarding US tariffs and additional rate cuts are needed to stabilize the situation.
In May, Toronto’s unemployment rate hit 9%, the highest level since 2012, not counting the COVID-19 period. On the bright side, Lululemon remains optimistic about Canadian consumers, despite growing job market challenges.
What we’re seeing in the latest employment data is a job market that is quietly weakening instead of collapsing. The report shows a small increase in jobs when many expected a decline, which might seem positive. However, rising unemployment at 7% continues a worrisome trend we’ve observed since late last year.
Reduced hiring in manufacturing and logistics suggests those sectors are slowing down, possibly due to weak demand or higher costs. Meanwhile, gains in some service sectors are barely enough to keep overall job numbers from falling.
Likely Monetary Response
This steady decline makes a response from policymakers more likely. Increased unemployment cannot be overlooked, especially in major cities. With Toronto’s rate now at 9%, we’re seeing levels not seen in over a decade, except during crises. Nevertheless, Lululemon’s expectation of stable consumer behavior shows a disconnect between perception and the overall economy.
Historically, weak employment data pressures central banks to ease policies, especially when inflation risks are low. Future rate decisions will likely reflect these changes. Lowering borrowing costs is one of the few ways to support demand without government help. A response in July now seems likely based on these trends.
Markets will closely monitor how job losses affect consumer spending. An ongoing rise in unemployment over the summer could slow wage growth, which is crucial for maintaining spending. Without improvements in hiring or interest rates, confidence among workers and small businesses may falter.
As economic activity decreases, the cost of inaction grows. Keep in mind that stabilization often starts from the margins. In past cycles, similar patterns led to multiple quarters of job losses, even when initial reports seemed stable—by the time the slowdown becomes apparent, action may already be underway.
It’s important to recognize how sentiment deteriorates as jobs become scarce. We’ve seen this before. When trading based on rate expectations, it’s crucial to understand that rate cuts alone may not revive hiring if fundamental issues persist. Relief from tariffs, especially across the border, might help, but it won’t change the trend if job growth keeps declining.
Currently, we’re not in a contraction phase, but the economy is underperforming. Without stronger indicators soon, any policy responses will simply be a matter of timing.
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Walmart’s Chief Financial Officer (CFO) recently shared that consumer spending has stayed mostly stable. While Walmart feels confident about this trend, other retailers, like Target and Lululemon, have voiced concerns about possible issues in consumer spending.
Target has noticed early signs of caution among shoppers, particularly in categories like home goods and electronics, which often see decreased spending during uncertain times. Lululemon has also mentioned that buyers are being more careful, especially with discretionary purchases. These warnings have become more common during recent earnings reports.
The contrast is clear. Walmart caters to a wide range of customers who prioritize essential goods, while other retailers focus on more discretionary items. This difference is important because it helps us understand which consumer behaviors may just be temporary and which could indicate a larger change in spending habits.
The data suggests that low- to middle-income consumers continue to spend on basics, while spending from higher-income consumers might be slowing down. For those of us in the derivative markets, this situation comes with both opportunities and risks. If Walmart’s optimism is accurate, demand for essentials like food and cleaning products should continue smoothly. This provides some stability for sectors focused on essential goods.
However, if spending patterns continue this way into summer, we might see shifts within various retail sectors. This could mean that price options for apparel, home decor, or fitness items may need adjusting. Longer-term instruments might already be reflecting a mismatch in implied volatility, especially around earnings reports.
For traders dealing with short-term volatility or speculative positions, being more selective is crucial right now. Stocks heavily exposed to non-essential spending may experience bigger fluctuations, particularly if they provide weak guidance or face earnings downgrades. In contrast, companies focused on essential goods or strong discount offerings are likely to see steadier trading activity—some of which is already being factored into downside puts and calendar spreads.
In terms of strategy, it might be wise to focus on changes in consumer sentiment rather than making broad retail bets. Using long gamma trades or spreads to express views on varying performances could be beneficial in the coming weeks. We’ll keep an eye on macro indicators like consumer credit usage and real wage trends for additional insights—these indicators often appear in consumer cyclical stocks before being discussed in economic policy.
Ultimately, it’s less about whether people are spending at all and more about what they are choosing to prioritize. These priorities will influence price changes, especially as we approach the upcoming round of retail earnings.
Fig 1: Retail sales trends in various sectors.
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