The unexpected non-farm payrolls and poor earnings reports from Intel and other companies led to another sharp drop in U.S. stocks yesterday, putting the Federal Reserve in a difficult position. Let’s break it down.

I said in my previous article that I expected a correction in the US stock market in September. It is a little earlier than I expected, but this week's data forced traders to run ahead and price the Fed behind the curve. From some indicators, the US economy has already fallen into recession, but the Fed will not echo this information. Even yesterday, Chicago Fed President Goolsbee said that the economy is not close to recession, and he also said that he would not look at only one month's data. Now the market and the Fed are at odds with each other. Some investment banks even think that the Fed needs to cut interest rates by 50 basis points in September and November, but the Fed is still not letting up, so there is a disagreement here, and the stock market does not like disagreements. They don't like the Fed to lose control, and now it is the market that is in power, so the stock market is sold off. Any small bad news is magnified. For example, Arm's financial report on Wednesday was okay, but the market decided to sell the stock as long as it was a little dissatisfied. Intel also suffered a bloodbath yesterday. It is still some time before September. If the market still has not changed its mind by then, a 25 basis point interest rate cut is not enough, which will be regarded as the hawkish interest rate cut I mentioned earlier. The market is bound to protest, so the current situation is very bad. The market is giving orders to the Fed, and the Fed is losing control. This is not good news for US stocks, the US dollar, or even the US market. Gold also plummeted after rushing to a historical high.

Following the previous two articles, Powell delivered to the market as he wished. The market has already priced in a September rate cut, and Powell also confirmed this. Although the initial policy statement was a bit hawkish, Powell confirmed at the press conference after the meeting that a September rate cut is coming. So we saw a big rise in US stocks, but it is worth noting that the leading stocks were not interest rate sensitive small-cap stocks, which is not what we expected to see, but AI companies and technology stocks, which is a bit worrying. The reason why small-cap stocks performed generally is that investors who had rotated out of technology stocks before are now back again.

This week is an important central bank week, and the market is already on high alert because the market has high expectations. If the results are not as expected, volatility will surge. The protagonists this week are the Federal Reserve and the Bank of Japan, which may be the two most important central banks in the world.

The market's current expectation for the Fed is not a rate cut. Only very few people expect a rate cut this time. The market hopes to hear from Powell that they will cut interest rates in September, because the September rate cut has been reflected in the price, and the market needs confirmation from Powell.
The market also expects the Bank of Japan to take action, which may be to adjust its bond-buying plan or to raise interest rates slightly. In any case, the market wants to see action, so the Bank of Japan cannot disappoint the market.