The U.S. economy shows "tariff resistance" resilience, with the market calm ahead of the non-farm payroll report
The U.S. economy has shown resilience to tariff policies, and options traders expect the S&P 500 index to experience the smallest volatility in months after the non-farm payroll report is released on Friday. Recent economic data has alleviated investors' concerns about the impact of tariffs, with the implied volatility of the S&P 500 index dropping to 0.9%. Although the market had previously panicked over tariff policies, the economic fundamentals remain solid, and market sentiment is improving. Economists expect approximately 130,000 new jobs to be added in May, with the unemployment rate holding steady at 4.2%
According to Zhitong Finance APP, option traders generally expect that after the release of the U.S. non-farm payroll report on Friday, the S&P 500 index may experience the smallest volatility in months. This phenomenon highlights that a recent series of better-than-expected economic data has effectively alleviated investors' concerns about the impact of the Trump administration's tariff policies on the economy.
According to statistics from Piper Sandler & Co., as of Tuesday's close, the prices of S&P 500 straddle options indicate that the market expects the index's volatility on Friday to be only ±0.9%. This is not only the smallest implied volatility before the non-farm data release since February but also significantly lower than the average actual volatility of 1.3% over the past year.
In early April, when President Trump announced the tariff list against global trading partners, concerns about the trade war dragging down U.S. economic growth suddenly intensified. The S&P 500 index briefly plunged to the brink of a bear market. However, as the Trump administration subsequently postponed or eased several tariff measures in the following weeks, coupled with key indicators such as inflation rates and job vacancies showing that the economy was coping well with the trade turmoil, market sentiment clearly improved. After several weeks of gains, the index is currently only down 2.8% from the historical high set earlier this year.
Citi stock trading strategist Vishal Vivek stated, "The tariff policy initially did trigger market panic, but the strong rebound in the stock market confirms the stability of the economic fundamentals. The main risk now is an unexpected jump in the unemployment rate; if that happens, the market will have to reprice expectations for economic growth slowdown."
Economists surveyed expect that the U.S. added about 130,000 jobs in May, down from 177,000 in the previous month, while the unemployment rate may remain at 4.2%.
Optimistic Expectations Rise
Traders' positioning reflects an optimistic expectation for the non-farm data. Data from the U.S. Commodity Futures Trading Commission shows that after the S&P 500 index recorded its best monthly performance since 1990 in May (up 6.2%), large speculators such as hedge funds have turned net short on CBOE Volatility Index futures for the first time in five weeks.
Solid economic data has strengthened market confidence. In late May, the Citi U.S. Economic Surprise Index (which measures the deviation of actual economic indicators from expectations) turned positive for the first time since the S&P 500 index set a record in mid-February. Meanwhile, the Atlanta Fed's GDPNow model predicts that the annualized growth rate of U.S. real GDP in the second quarter will reach 4.6%, a significant improvement from the 0.2% contraction in the first quarter.
Of course, unexpectedly weak non-farm data could still undermine market sentiment.
A report from the JPMorgan trading team led by Andrew Tyler on Monday stated that if May's job additions fall below 100,000, the S&P 500 index could face a 3% decline. However, he estimates that the probability of this scenario occurring is only about 5%. In the baseline scenario, job additions will be between 115,000 and 135,000, corresponding to an index increase of 0.25%-1%
This employment data will also provide key clues for investors to assess the Federal Reserve's policy path. In the face of multiple challenges such as the uncertainty of the trade war, slowing economic growth, and inflation acceleration potentially triggered by tariffs, the Federal Reserve is trying to seek balance in adjusting policy interest rates. It is worth noting that the Federal Open Market Committee will enter a quiet period before the interest rate decision on June 18 this weekend.
Larry Benedict, CEO of financial market research firm The Opportunistic Trader, stated: "Even if employment growth slows slightly, the market will remain tolerant, as employment data is lagging. The substantial impact of tariff policies on the job market will take at least several months to show up in the data."
