After a mostly flat market last week, expectations for a 50 basis point rate cut in September suddenly surged to about 50% on Friday from around 15%, with little clear news to explain the change. Economic data that was largely in line with expectations was not a factor, while the Federal Reserve remained in a blackout period, leading market participants to speculate that the repricing may have been triggered by comments from former Fed officials and journalists.

First up is Timiraros of the Wall Street Journal, who quotes Jon Faust, Powell's former senior advisor, as saying there is a "slight preference to start at 50 basis points" and that he believes there is "a good chance the FOMC will do that," and further, he mentions that the Fed could manage investor concerns about a larger rate cut with "a lot of verbal explanations... so that a big rate cut wouldn't be a sign of concern," and that if the Fed instead chooses to start with a smaller 25 basis point cut, it could cause "awkward questions."

Next, the Financial Times also published an article saying that it would be a very difficult decision for the Fed to cut interest rates by 25 or 50 basis points in September. Finally, former New York Fed President Dudley made a stronger comment, saying "I think there is a strong case for a 50 basis point cut, whether they will do it or not," adding that considering that the current federal funds rate is nearly 200 basis points above the neutral rate, "so the question is: why not start cutting rates now?"

The U.S. Treasury yield curve continued its bullish steepening trend as interest rates were repriced, with 2/10s rising 4.5 basis points, bringing the curve to its steepest level in 2 years and returning to positive territory after a long period of inversion (since 2021).

We have spoken several times about the “policy change” of the Fed’s official shift to an easing bias, evident through the continued yield curve steepening and the bond-equity correlation moving back into negative territory.

Over the past year, stocks and bonds have moved in near lockstep, with both asset classes reflecting the market’s one-way bet on Fed policy. However, since the August “flash crash,” markets have once again begun to focus on the trajectory of the economy rather than just the Fed’s stimulus measures, pushing both asset classes back into risk-spreading mode.

With U.S. interest rates once again in the spotlight, FX markets are reacting, with both the U.S. Dollar Index (DXY) and USD/JPY (USDJPY) moving in tandem with yields, hovering around the technical key levels of 100 and 140 respectively. On the other hand, U.S. stocks have at least temporarily bucked seasonal weakness, with the SPX having one of its best performances of the year last week.

Part of the strong rebound may be due to fund managers' search for yield, with JPMorgan reporting $55 billion in outflows from equity mutual funds in August, the worst so far in 2022. Is there a chance of a sharp reversal in the all-important late September month, 50 basis point rate cut or not?

On the cryptocurrency side, as macro sentiment continues to dominate price action and in the absence of other significant developments on the chain, BTC's correlation with SPX has risen to near all-time highs, with BTC prices recovering to 58-58 as market sentiment temporarily improves. In the $60k range, the BTC ETF also saw $263 million in inflows last Friday, and even the ETH ETF’s outflows temporarily stopped, while as traders continue to tend to sell covered calls for gains, the implied volatility is dropped.

However, despite the temporary relief, medium-term resistance and challenges remain and ETH continues to face difficulties, with ETH/BTC having fallen to a 5-year low with no end in sight.

In news, Coinbase announced the launch of its own wrapped BTC (cbBTC) and SWIFT announced plans for a tokenized asset transfer infrastructure, fueling concerns over the increasing centralization of digital assets, but as traditional finance (TradFi) gains ground in cryptocurrencies The field continues to grow in influence, and this trend is likely to continue.

This week will be full of central bank activity, including meetings of the Federal Reserve, Norway, Japan, the United Kingdom, Brazil, South Africa, Thailand, Taiwan and Indonesia. In terms of economic data, China's credit supply and retail data will be watched to understand the continued slowdown in the economy, while Tuesday's US retail sales data should be the most important data before the FOMC meeting, which may affect the final decision of a 25 or 50 basis point rate cut.

Good luck to everyone, and the SignalPlus team looks forward to connecting with you further at the Token 2049 event this week!

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