Option traders "ignore" non-farm payrolls! Employment has become background music, inflation is the main character determining the fate of US stocks.

Notice that Wall Street traders are expecting a strong jobs report on Friday. However, this may not be enough to calm the markets as the oil price shocks caused by the war are increasingly shifting investors' focus towards inflation. Despite stock markets hitting record highs, they have largely turned a blind eye to the high oil prices over the past few months. But beneath the calm surface, worries about how long inflation pressures will last and what actions the Federal Reserve will take are growing. Data compiled by Citigroup shows that traders expect the Fed's rate decision on June 17 to be the biggest event for the S&P 500 index in the next month, followed by the Consumer Price Index (CPI) report on June 10. The options market is betting on a 0.6% volatility in the benchmark index on Friday, which would make it one of the calmest non-farm payroll days in months. Larry Benedict, CEO of financial market research company The Opportunistic Trader, said, "Employment data is no longer as important to traders as all eyes are now back on inflation indicators and how they might impact interest rates." "Strong employment numbers present another challenge for the Fed as officials are trying to prevent the economy from overheating." Traders are closely watching the jobs data to look for clues on whether the labor market and wages continue to strengthen following a slight increase in consumer spending in April. The median forecast from economists surveyed indicates that nonfarm payrolls are expected to increase by 85,000. The unemployment rate may remain steady at 4.3%, while average hourly wages are expected to grow by 0.3% month-on-month. The stable momentum in the labor market comes amid high inflation eating into household incomes and pushing the savings rate to almost a four-year low. This situation has left traders trying to predict the Fed's interest rate path conflicted. Bond traders are currently pricing in the hikes for this year, indicating market confidence that the Fed's new chairman Kevin Wash will need to act quickly to counter inflation. Rate Path Outlook Friday's jobs data will be the last monthly employment report before Fed officials enter a blackout period ahead of the policy meeting. Stuart Kaiser, head of equity derivatives strategy at Citigroup, said the implied volatility of 0.6% for the S&P 500 index that day is below the average actual volatility of 0.7% on previous employment release days over the past year. Fed Governor Christopher Waller described the employment situation as trending towards stable, although investors need evidence to prove that it remains the case. But when predicting the trend in borrowing costs, the CPI report seems to have surpassed jobs data in importance. Fed Governor Lael Brainard signaled last week that accelerating inflation is a bigger policy concern currently than the labor market. Similarly, Tuesday saw Cleveland Fed President Loretta Mester, who has a vote in the monetary policy this year, suggest that more restrictive interest rate levels may be needed to counter inflation risks. Andrew Taylor, head of global market intelligence at JPMorgan, said in a report on Tuesday that if the employment created in May is less than 40,000, the S&P 500 index could fall by as much as 1.5%. However, he estimated that the probability of such a result is around 5%. Taylor pointed out that if the job additions last month were between 70,000 and 100,000, which is the scenario most likely to occur at JPMorgan trading desks, the S&P 500 index is expected to rise by 0.5% to 1%. Expectations from JP Morgan on Employment and Market Volatility Traders believe that there is practically no risk in the coming weeks as the economy continues to show resilience and volatility remains low. The Chicago Board Options Exchange Volatility Index (VIX, fear index) is currently well below the key level of 20, which typically indicates rising market pressure. However, there are still plenty of unexpected factors that could cause market turmoil. As the first quarter earnings season draws to a close, investors are looking for new substantial catalysts to sustain this bull market after the S&P 500 index has surged over $11 trillion in market cap since the end of March. Investors are wary of overheating jobs reports as they could signal an overheating economy, leading to a delay or postponement of rate cuts, and sparking concerns about long-term entrenched inflation. Daniel Kilts, head of options at brokerage Piper Sandler & Co., said traders are generally comfortable with job growth of around 100,000. He added that if the data consistently falls significantly below this level for several months, the options market may shift its focus from inflation back to hiring. "Traders are currently more concerned about the risks of rising inflation and interest rates," Kilts said. "So, as long as there is any slightly positive news on employment, the market can accept it."