Look who's back?
As we mentioned in last Thursday's FOMC meeting summary, Chairman Powell demonstrated a confident dovish stance at last week's FOMC meeting and took aggressive action to cut interest rates by 50 basis points early while still advocating for the economy. A soft landing perspective. The results are obvious. This is a significant dovish stimulus, marking the official start of a new round of Fed easing cycle. Risk markets took about 12 hours to digest this information, and then pushed the stock market to a new all-time high. Say yes. What about the recession?
Fixed income markets remain relatively calm, with relatively stable yields, though a steepening trend in the structural curve is beginning to emerge. 2-5 year yields remain at year lows after rate cuts, while 10-30 year yields rise on the back of improved risk sentiment and protection against a pickup in inflation, with the important core PCE data to be released this Friday. While others may disagree, we believe that a 50 basis point rate cut at this time is “unconventional” based on economic fundamentals alone (Atlanta Fed GDP growth forecast remains around 3%, the job market remains solid, and inflation remains above 2%), so the Fed’s actions should be seen as a clear dovish signal, and the market has good reason to respond to it in the short term.
So what could derail the rally? Ultimately it comes down to the hard data the Fed has been hinting at. The key remains to be 1) the extent of the U.S. job market slowdown and 2) the pace of the CPI slowdown, both of which remain favorable to the Fed for now unless economic conditions prove the market wrong. In other words, this rally will be overturned. "Presumption of innocence" until the economy slows significantly enough that even Fed easing cannot save it.
For U.S. stocks, entering a soft landing with no significant downside risks, aggressive rate cuts can only mean that stocks will hit all-time highs again, which is exactly what happened last week. Stocks have managed to weather negative seasonal factors in September, and even Trump's poll decline has failed to halt a rally in risk assets, with high-beta sectors such as AI stocks poised to accelerate again. Similar to the situation in the bond market, economic data remains critical and investors are likely to maintain a buy-on-the-dip strategy in the final month before the election. Finally, technical indicators suggest that the SPX Index has momentum for an upward breakout and is worth watching in the near term.
On the cryptocurrency front, BTC prices rebounded significantly last week, rising 6%, as correlations with stocks (and gold) returned to two-year highs, with BTC re-aligning with the 3x leveraged Nasdaq index, However, cryptocurrencies have the opportunity to see more dramatic moves in the short term, especially altcoins, which had a very strong performance last week. Even the much-criticized ETH managed to gain 11% in the past week without any new developments. We believe this rally is likely to continue as the Fed's "dovish turn" finally becomes the market consensus.
Altcoins’ strong rebound is an encouraging sign, and as long as stock market sentiment holds, there is a chance for more rebound momentum in the short term. Inflows to BTC spot ETFs have recovered over the past week and are expected to hit a cumulative high by the end of the month. Will this price rebound be able to save ETH ETF inflows? We think the answer will depend on whether the stock market can top out again before November, and the market has begun to benefit from the Fed’s dovish turn.
Another positive factor for ETF inflows may come from the US SEC’s approval of ETF options listing. As we have long emphasized, options are one of the mainstream asset classes in TradFi and are favored by many institutional investors, so it is only a matter of time before options enter the cryptocurrency market and are widely used in the future.
Speaking of options, the TradFi market is seeing over $4.3 trillion in US equity options expiry this week, and index options activity is especially high now that almost everyone is an index volatility trader. Will investors take more call options action after month-end expiry? Is it time to buy some BTC out-of-the-money calls? Be sure to keep an eye on this space.
Next, markets will focus on a slew of Fed officials speaking, with three on Monday, six on Thursday (including Powell) and two more on Friday. Markets will be particularly focused on Powell's speech on Thursday to gauge his reaction to the significant easing of financial conditions, while the only U.S. economic data of note will be PCE data on Friday.
Overall, the base case for the macro market is to continue to slowly rise, with risk premiums in the options market pricing low ahead of the release of the non-farm payrolls data on October 4. We do not expect Fed officials to "rock the boat" in their upcoming talks, and the most likely market move will still be to the upside.
I wish all readers smooth trading, but please be careful when going against the Federal Reserve!
