US equities suffered their worst weekly close since March 2023, while yields closed at around their lowest levels this year following a disappointing NFP that revived concerns over an incoming recession with a Fed that’s increasingly seen as being behind the curve.
NFP came in at +142k in new jobs created (vs 160k consensus), along with -89k in prior downward revisions, and an unemployment rate steadying at around 4.22%. The soft headline now puts the 3m average at <100k in job creation, and is the weakest quarterly trend since 2012. All of a sudden, private sector growth is on pace to see the weakest growth it has been in over a decade, with an economic recession appearing more imminent than it has been in quite sometime.
Asset prices reacted as one would expect. Treasuries saw a bull-steepening move with saw 2yr yields fall by -12bp at one point in the session, and the 2/10s curve steeper by 6bp on the day to finally disinvert to positive territory. However, a surprisingly ‘balanced’ Governor Waller chose not to endorse either a 25bp or 50bp cut in Sep, causing fixed income to give back some of its early gains.
*WALLER: IF APPROPRIATE, WILL ADVOCATE FOR ‘FRONT-LOADING’ CUTS
*FED’S WALLER: CURRENT BATCH OF DATA ‘REQUIRES ACTION’
*WALLER: IMPORTANT TO START RATE CUTS AT NEXT FED MEETING
Experienced macro observers will note that the last thing should do would be to incite panic and to over-react even in the face of weakening data. Any liquidity benefits of rate cuts would be quickly nullified by fears over a hard recession, should officials over-extend their hand in the current phase. As such, following Waller’s measured response post NFP, Treasury Secretary Yellen threw her own weight into the issue, by explicitly stating that the US economy remains ‘solid’ and on the path to ‘soft landing’.
“We’re seeing less frenzy in terms of hiring and job openings, but we’re not seeing meaningful layoffs,” Yellen said at the Texas Tribune Festival in Austin. “I’m attentive to downside risk now on the employment side, but what I think we’re seeing, and hope we will continue to see, is a good, solid economy.” — Yellen
Bond investors are a forward looking bunch; interest rate futures quickly revised Sep FOMC pricing lower toward 25bp in reaction to Waller’s & Yellen’s comments, but have priced in ~80% of 50bp cuts in both November and December meetings as the US economy is slowing more aggressively.
As expected, all of this was bad news for stocks and risk assets. A 3% drop in the Nasdaq and 2% drop in SPX saw the latter product its worst weekly losses since 2023, while the VIX has rebounded towards 25 as macro assets fell across the board.
The current downdraft in stocks is coming at a time when both US retail and professional money managers have exceptionally long exposures to US equities. WSJ reports that US households have now allocated >40% of their wealth to financial assets, a record high, while long-only asset managers have remained steadfastly long SPX even after the recent August drawdowns.
Mixing an economic slowdown, record long positioning, and statistically poor stock market seasonality in September? Count us in for the bear-camp in the near foreseeable future.
Similar to our view on equities, our supporters might remember our comment from late last week that crypto would need a near-perfect mix of NFP outcomes to see higher prices. Instead, we received one of the worst-case outcomes as the repricing of risk sentiment dragged BTC down to ~54k and ETH to 2.2k, losing another ~6% on the week and continuing its recent underperformance.
ETF flows remain disappointing, with BTC seeing outflows of $170 million on Friday, keeping the losing streak at 8 consecutive days. ETH lost another $6 million on the day and cumulative flows have been declining precipitously since its July launch, with no apparent light at the end of the tunnel, yet.
Furthermore, rising implied and realized volatilies have weakened the risk-return profile of crypto at the current juncture, and its lack of risk-diversification properties (ie. SPX correlated) have weakened the near-term inflow narrative.
On-chain analysis from Glassnode paints a similar picture, showing increasing downside pressures and rising unrealized losses. It is perhaps no surprise that hedge funds are seen to be building on their short-positions against asset manager longs across listed BTC and ETH instruments, and we expect crypto sentiment to remain challenged and liquidation pressures to rise significantly as we approach $50K on BTC.
Looking ahead, the coming week might see more risk reduction with a lack of positive catalysts on the horizon. The focus will be on the US Presidential Debate on Tuesday, along with a busy week of inflation data (incl. US & China) and central bank speeches across the globe (ECB decision, RBA and BoJ speeches). We are cautious on risk exposures here and see tougher times ahead, with equities likely to remain on the backfoot this week and into the FOMC.
