Benign Payrolls Reaction Points to Lower Cross-Asset Volatility

The slump in volatility across asset classes after Friday’s U.S. jobs report is suggestive of a benign environment where risk assets can push higher, according to some strategists.

The Cboe Volatility Index dropped 9% Friday close to pre-pandemic levels, while the ICE BofA MOVE Index -- a gauge of price swings in Treasuries -- slumped 8%. Similar measures for currency markets and junk bonds also declined, extending a trend which has seen the four cross-asset volatility gauges fall between 10% and 30% so far this quarter.

Benign Payrolls Reaction Points to Lower Cross-Asset Volatility

In particular, lower Treasuries volatility “should reinforce the arguments that equity risk premia are not overstretched and by extension keep equity volatility lower and the equity market higher in the coming weeks,” wrote Michael Purves, chief executive officer of Tallbacken Capital Advisors LLC in a note Sunday. “All in all, the stage is set for risk-on to stay on in the coming sessions.”

Data Friday showed U.S. job growth picked up in May, but not enough to intensify worries about rising inflation driving bond yields higher, a concern which has buffeted stocks this year. U.S. equities gained on the news with the S&P 500 Index climbing to within a hair’s breadth of its all-time high, while benchmark Treasury yields retreated.

S&P Rises After Jobs Market Shows Progress, But Needs Support

At the same time, incoming data on price pressures could yet upset some of the calm. For instance, a surprise in the U.S. inflation print due Thursday could buffet bond yields, the dollar and gold and technology stocks, according to Chris Weston, head of research at Pepperstone Financial Pty.

“It will likely be the event to watch this week,” he wrote in a note.

The ongoing lack of price swings in equity markets suggests gauges of volatility -- which are based off expected moves -- could continue to decline, according to UBS Group AG strategist Stuart Kaiser.

“We see the VIX Index about 2 points too high given that realized volatility has declined so much,” he wrote in emailed comments.

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