SignalPlus Macro Analysis: Economic slowdown is happening, the Fed should calm the market as soon as possible
There are still questions about whether the Federal Reserve will cut interest rates significantly during a politically sensitive period, and the Jackson-Hole meeting may be a key moment to calm market sentiment.
Original title: "SignalPlus Macro Analysis Special Edition: Cliff Dive"
Original source: SignalPlus
Last Friday's weak non-farm payrolls data caused a major earthquake in macro assets. After the data was released, asset prices fluctuated violently by multiple standard deviations, and the aftershocks continued into the new week.
Non-farm payrolls increased by 114,000, one of the weakest data since the epidemic, and the values of the first two months were also revised down. Average hourly wage growth slowed to 0.2% month-on-month and 3.6% year-on-year. The unemployment rate unexpectedly rose to 4.25%. The unrounded value was close to the threshold (4.28%) that triggered the "Sahm Recession Indicator". The market was merciless and risk assets were severely hit across the board.
In addition to the non-farm payrolls report, last week’s economic data were also relatively weak. The US manufacturing index experienced the largest contraction in 8 months (-1.7 points to 46.8), mainly due to reduced orders and production and a decline in employment. Some industry comments seem to indicate that an economic slowdown is occurring (Source: Bloomberg):
· “The economy appears to be slowing significantly, with a significant increase in sales calls from new suppliers and a reduction in our own order backlog.” - Machinery
· “Demand continued to be weak in the second half of the year, and supply chain pipelines and inventories remained ample, reducing the need for overtime. Geopolitical issues between China and Taiwan and the November election remain a focus.” - Transportation Equipment
· “Sales volumes were lower, customer orders were lower than expected, and consumers appear to be pulling back on spending.”—Food, Beverage Tobacco Products
· “Unfortunately, our business is experiencing its sharpest decline in order levels in a year.”—Fabricated Metal Products
· “Business is slowing and we are taking cost actions.”—Electrical Equipment Appliances
· “Some normally stable markets are now showing weakness.”—Non-Metallic Mineral Products
· “Higher financing costs are dampening residential investment demand, which is reducing our demand for parts and inventory.”—Wood Products
The market was caught in a multi-standard deviation sell-off. Tech stocks fell 2.5% on the day, chip stocks have plunged more than 20% since July, 2-year Treasury yields fell 26 basis points to 3.87%, VIX soared to nearly 30, and USD/JPY plunged to 145, almost giving up all of its gains for the year in one go.
Bond traders and the Fed Funds futures market quickly lowered forward rate expectations, with JPM and Citi expecting 50 basis point cuts in September and November, and then another 25 basis point cut in December, for a total of 5 full cuts by the end of the year. The 2-year yield is at its most inverted level to the policy rate since the global financial crisis. The market believes that the Fed is lagging the curve significantly, but we do not necessarily agree with this view. Instead, we believe that the rate movement is a bit overreacting.
Some readers may remember the market's obsession with using the yield curve inversion as a recession signal, but as we mentioned before, this is not a very useful signal in itself. We have had more than 500 days of inversion without any recession. However, what is more worrying is that when the market "admits" that the economy is starting to slow down and starts to price in a large rate cut and buy bonds in the short term, the curve will immediately have a dangerous bull steepening after the inversion, which is exactly what is happening now.
This can partially explain why the market reaction this time is so violent compared to previous cases of data missing expectations and bonds rebounding.
Similar to other asset classes, crypto prices have plummeted, with BTC falling 20% last week, almost wiping out gains since the ETF announcement in January, ETH falling to the $2,000 range, and altcoins also falling 30% to 50% over the past week.
We can certainly blame the price drop on weak ETF inflows (especially ETH), but cryptocurrencies are ultimately showing that what they really represent is the "leveraged Nasdq index", and prices are simply "catching up" with the decline in technology stocks since early July. In addition, when the price fell below the 3,000 mark, profit and loss protection and risk stops of large funds led to the sale of more than $1 billion in ETH.
Forecasting the trend of cryptocurrencies is actually a forecast of the trend of US growth stocks, and by extension, a forecast of whether a recession is imminent, that is, whether 4.5 rate cuts before the end of the year are reasonable. Although the US growth trajectory is slowing, we have not seen any actual "hard" data close to a recession, and we think it would be unwise for the Fed to react to the drastic change in market sentiment, which would only be counterproductive to increasing market confidence.
After all, weren't we talking about a "no landing" (i.e. growth) situation a few months ago? In addition, with the US election approaching, can the Fed really cut interest rates by 100 basis points under political cover when the Atlanta Fed GDPNow still predicts GDP growth of 1.8–2% in the third quarter?
The main damage has been done, and the Fed has an opportunity to calm the market and avoid sounding the alarm at the upcoming important Jackson-Hole meeting.
I wish you all the best in this difficult period.
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Disclaimer: The content of this article solely reflects the author's opinion and does not represent the platform in any capacity. This article is not intended to serve as a reference for making investment decisions.
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