Since the US Federal Reserve (Fed) cut interest rates by 50 basis points a week ago, there has been debate over whether the easing move is aimed at normalizing tight monetary policy or preparing for an impending economic downturn.
Risk assets, including Bitcoin (BTC) and altcoins, have rallied since the Fed’s decision, suggesting the market views the rate cut as a normalization move. Some analysts predict the rally will accelerate once Bitcoin breaks above the $65,200 resistance level.
However, at least three indicators have pointed to upcoming economic uncertainty, prompting caution from bulls. It is possible that the Fed has overdone its rate cuts, especially given these forward-looking indicators.
Unemployment is rising.
The U.S. Household Survey, which tracks unemployment rates in all 50 states, Washington DC and Puerto Rico, found that through August, more than 57% of states had seen unemployment increase compared to the previous month and the same period last year, according to data from MacroMicro.
The fact that most states are seeing rising unemployment rates means that there is a risk that falling consumer income, spending, and investment, as well as a decline in business and consumer confidence in the near term, could lead to a sharp economic downturn, if not an outright recession. This downturn could cause investors to reduce their exposure to risky investments.
“According to the August analysis, 57.7% of US states reported higher unemployment rates than the previous month and year. This indicates increasing challenges in the labor market, which could signal a broader recession,” MacroMicro said on X.
Lead/lag ratio
The Conference Board’s Leading Economic Index (LEI) fell to 100.2 in August, its lowest level since October 2016. The index marked the sixth consecutive month of decline, signaling a recession. The LEI includes a number of forward-looking indicators such as average weekly hours in manufacturing, average weekly initial claims for unemployment insurance, the ISM new orders index, stock prices and leading credit indicators. The index is widely watched to identify shifts in economic trends and turning points in asset prices.
Worryingly, the ratio of leading to lagging indicators has fallen below 0.85, its lowest level since the 1950s, according to data from Jeff Weniger, director of equities at WisdomTree. The decline over the past several months suggests a slowdown or recession is imminent as lagging indicators catch up with economic reality. The ratio has seen eight similar collapses in the past, each of which signaled a recession.
Gold/Brent Ratio Soars
The ratio of gold futures to Brent crude futures has risen more than 35% this year to nearly 40, its highest level since 2020, according to data from MacroMicro. Gold is considered a safe haven and a hedge against inflation, while oil is tied to global demand and economic activity. Therefore, gold's sustained outperformance over oil is often seen as a sign of an economic downturn.
*The Lead/Lag ratio is an economic indicator used to compare leading economic indicators with lagging economic indicators. Leading indicators typically predict future trends in the economy, while lagging indicators reflect current or past conditions.
