Treading water ahead of a possible NFP economic storm

Treading water

Markets did what they often do on the eve of Non-Farm Payrolls—they drifted sideways in a fog of indecision. Intraday positioning is light, conviction lighter. Investors are trimming their exposure like chefs prepping for a storm, not wanting to be caught off guard by one more whipsaw labour print in a week already littered with scattershot tier-2 jobs data. This is classic pre-NFP paralysis—where risk is measured, not chased, and where traders would rather lose small than guess big.

The broader tone is one of cautious disengagement. The Fed’s Beige Book dropped a “slightly pessimistic and uncertain” outlook—hardly a market-moving line, but enough to fan the flames of a slowly cooling U.S. macro picture. The political heat is rising too. Powell's getting it from all angles now—Trump’s Twitter flamethrower joined by Bill Pulte from FHFA, both demanding immediate rate cuts as soft ADP and weak ISM Services add fuel. But the Fed isn’t blinking. Yet.

That’s not stopping markets from front-running the idea. Treasury yields have stabilized, but there’s a clear “rate cut or else” tone building in bond vols and swap spreads. The 10Y swap spread has narrowed to 52bps, and with next week’s auctions looming, any whiff of political interference or inflation stickiness could see risk premiums spike again.

The Dollar chop

Meanwhile, FX traders are watching the dollar chop lower despite stable rate differentials. Since Trump’s 90-day tariff pause in April, the greenback has rolled over even as the 2y2y forward spread versus G10 has barely twitched. That divergence suggests a flow-driven, rather than rate-driven, approach: little in the way of foreign inbound US equity flows, bleeding into FX.

The euro, however, isn't the bid-catcher one might expect in a soft dollar tape of late. That’s because the ECB is expected to show up dovish today—25bps in the bag, with a strong possibility of downward revisions to inflation forecasts that pave the way for more easing into September.

Volatility’s still simmering under the surface. EUR/USD and USD/JPY 1-month implieds are holding above 8% and 11%, respectively. The term structure has a kink around the two-month mark—no coincidence given Trump’s tariff pause ends on July 9. Traders are bracing for a potential reboot of trade war rhetoric to coincide with the tail end of the summer lull. Options desks are quietly loading insurance.

So, where does that leave the dollar?

Soft, but not broken. We’re in no man’s land—caught between weaker data, political pressure, and a Fed still playing it coy. The DXY should remain soggy in a 98.50–99.50 range, but a dovish ECB could give it a temporary reprieve today. The real swing factor is tonight’s NFP. Whispers of a sub-100k print are making the rounds. If that hits, expect rate cut pricing to scream higher and the dollar to take another leg lower—especially if unemployment ticks up.

For now, traders are tightening stops, selling rips, and watching the screen with a bit more caffeine.

The Dollar’s off script

Currency markets are supposed to be disciplined beasts—governed by rate differentials and macro logic. But right now, they’re trading like a drunk in a wind tunnel. Since the April 9 tariff ceasefire, the dollar’s been getting smoked—yet the trade-weighted rate differential vs. G10 has barely budged. The 2y2y forwards, my go-to for terminal rate expectations, are flatlined. So rate space isn’t driving this. Which means something else is.

The cleanest explanation? Flow. Equity flow, to be precise. For two years the world mainlined U.S. exceptionalism like it was 1999—tech dominance, AI dreams, big-cap defensiveness, all on repeat. But the shine’s wearing off. Foreign money is quietly stepping back—not because of falling U.S. rates, but because the macro narrative is starting to fray. That derisking in equities? It’s leaking into FX. This isn’t about fundamentals—it’s about portfolio rotation.

Now, here’s where it gets murky. There’s another interpretation. One with a lot more smoke under the hood: this could be about belief—about whether the U.S. is still the center of the financial universe. You can’t chart it, you won’t see it in the dot plots, but you feel it in the price action. The slow churn of de-dollarization headlines, the shadow of $35 trillion in debt, the question mark hanging over U.S. leadership in a multipolar world. That kind of thing doesn't show up in a spreadsheet, but it moves capital just the same.

The view: Price action doesn’t always shake hands with logic

If Wednesday proved anything, it's that price action doesn’t always shake hands with logic. Equities powered higher for a third straight session, the Nasdaq clawed its way back into the green for the year, and global stocks quietly notched fresh all-time highs. All this, despite a backdrop that looked more like a macro minefield than a risk-on runway.

The day’s headlines read like a checklist of what should have broken the market’s stride: ADP payrolls cratered to their weakest pace in over two years, ISM Services slipped into contraction, and input prices soared to their highest level in two-and-a-half years—stagflation on a platter. Treasury yields got the memo, plunging hard as bonds staged a classic ‘growth scare’ rally. Gold popped. The dollar wobbled. And yet equities? They simply didn't care.

Even as rare earth disruptions continue to rattle global auto supply chains—forcing shutdowns at European parts plants—stocks chose to look past the noise. The narrative confusion only deepened when President Trump hopped on social media to hammer Jerome "Too Late" Powell, demanding immediate rate cuts and citing (somewhat inaccurately) that “Europe has already lowered rates nine times.” The ECB, for the record, has cut seven times and is likely to make it eight on Thursday.

Meanwhile, the Bank of Canada sat on its hands, echoing Powell’s “wait and see” stance, while dangling the carrot of future cuts if the economic drag from tariffs deepens. A rare move of patience in a market screaming for action.

The truth is, we’re watching a tug-of-war between real economic stress and the ever-powerful force of liquidity and positioning. Equities are riding a wave of disinflation momentum and global easing expectations—even as the U.S. risks being the odd one out. While OECD sees inflation cooling across G20 economies, it flagged the U.S. as the stubborn exception, projecting a near-4% print later this year, driven largely by tariffs.

And that’s the market’s strange dilemma: globally, disinflation is in the driver’s seat, forcing central banks like the ECB to gear up for further easing. But in the U.S., the Fed is stuck between a rock and a hard place—cooling PCE prints on one side, but consumer inflation expectations still hovering at generational highs on the other. With U.S. yields still miles above G10 peers, the dollar remains stubborn, and risk assets continue to play the bad-news-is-good-news game—until it’s not.

The path forward? Expect more days where the price action seems untethered from the tape. Markets are climbing a steep wall of macro worry, aided by passive flows, positioning squeezes, and the belief that central banks will always ride to the rescue. But if Friday’s NFP confirms the stag without the flation, the narrative could flip fast—from a Fed that’s “paused” to a Fed that’s “pinned.”

For now, it’s levitation on low conviction. But as always, gravity has a way of asserting itself—eventually.