Last week was a painful one for macro trading, with many popular trades (e.g., high-tech stocks, USD/JPY, etc.) seeing significant liquidation, while realized volatility on the SPX jumped to its highest level in a year.
While there was no single catalyst, President Biden’s exit from the race coincided with the unwinding of various “Trump trades,” particularly in the stock market. In addition, the “Great Rotation” remains in full swing, with stock market investors continuing to rotate out of growth stocks and into small-cap stocks as earnings season approaches, and options traders are the most bullish on small-cap stocks in nearly 20 years (based on a risk parity measure).
Economic momentum has also begun to deteriorate further. The Global Economic Surprise Index is at its lowest level of the year. After the release of non-agricultural employment data last month, the probability of a recession in the Sahm Recession Index has risen to 80%. This indicator measures the gap between the 3-month average unemployment rate and the low point of the past year. The current reading is 0.43%, which is very close to the threshold of 0.5, which is a signal that the economy is about to begin a recession.
Meanwhile, easing inflationary pressures have opened the door for the Fed to cut interest rates, with the PCE price index falling to 2.5% year-on-year last Friday, moving toward the Fed's long-term target of 2%. Average hourly wage growth also fell from a high of 6% in 2022 to 3.9% last month, consistent with labor slack and a slowing job market.
Recent developments have prompted some macro observers to call for the Fed to cut rates earlier than the market expects. Mohamed El-Erian, former CEO and CIO of Pimco, expressed the view that a soft landing could fail if "unhelpful noisy data is allowed to delay rate cuts beyond September." Former New York Fed President Bill Dudley also said that the Fed needs to cut rates as soon as possible because "waiting until September to cut rates would unnecessarily increase the risk of recession."
That being said, the market sees the more likely scenario as the Fed staying on hold this week (chance of a rate cut <5%), while a September rate cut is priced in at just over 100%, suggesting the market has started to factor in the possibility of a 50bps cut in September.
In addition to the Fed, there are two major central bank meetings this week: the Bank of Japan and the Bank of England. The market generally expects the Bank of Japan to keep interest rates unchanged, but further reduce the scale of bond purchases to allow long-term yields to rise further. On the other hand, the market expects the Bank of England to cut interest rates by 25 basis points, but 8 of the 32 economists surveyed by Bloomberg expect it to keep interest rates unchanged. Both central bank meetings have the potential for surprises, and interest rate volatility is expected to increase this week.
In addition to the central bank meetings, this week is also US employment data week (ADP, JOLTS, NFP), and Amazon, Apple, Meta and Microsoft will release earnings reports between Tuesday and Thursday. All of this will happen at a critical time when the Nasdaq is at important technical support levels, and thin liquidity during the summer vacation may further increase volatility.
On the cryptocurrency front, Trump’s much-anticipated Nashville conference attendance turned out to be a bit lackluster. As expected, his appearance was more of a campaign and fundraiser, and it would be unrealistic to expect any concrete details to be announced (such as purchasing BTC as a strategic reserve). That being said, the former president still made some “feel-good” comments, such as “I am developing plans to ensure that the United States becomes the global cryptocurrency capital and the Bitcoin superpower of the world” and named the Winklevoss brothers, describing them as “male models with brains”, which is still relatively positive for the long-term narrative of cryptocurrency.
In addition, Bloomberg reported that cryptocurrency donations for the 2024 election have exceeded the total of all previous cycles (including the FTX/SBF era). Since announcing the acceptance of donations in May, Trump's campaign team has received more than $4 million in cryptocurrency donations. Republican Senator Cynthia Lummis said she plans to draft a bill requiring the government to reserve 1 million BTC within 5 years and hold it for 20 years (although the bill is almost impossible to pass in Congress).
BTC is back to the familiar $67,000 price range, where it has been trading almost exclusively since March. In addition, we saw a sharp shorting of BTC implied volatility after Trump’s speech, and we may have to take more cues from the Fed and other central banks’ pivots to have a chance to try again in Q4 to push BTC above $70,000.
I wish you all the best in trading during this long and hot summer!
