Last week's disappointing nonfarm payrolls data reignited market concerns about an impending recession and the market's growing view that the Federal Reserve is lagging behind the yield curve, causing U.S. stocks to suffer their worst single-week performance since March 2023, while yields closed near their lowest levels this year.

Nonfarm payrolls increased by just 142k (160k expected) and the prior reading was revised down by 89k, while the unemployment rate remained at around 4.22%. The weak data brought the three-month average of new jobs down to below 100k, the weakest quarterly trend since 2012. Suddenly, private sector growth is falling to its lowest rate in more than a decade, and a recession seems more imminent than ever.

Asset prices reacted as expected, with US Treasuries showing a bullish steepness, with the 2-year yield falling 12 basis points at one point, while the 2/10s curve steepened by 6 basis points and finally reversed into positive territory. However, the stance expressed by Fed Governor Waller was unexpectedly "balanced", with no clear statement on a 25 or 50 basis point rate cut in September, which caused the fixed income market to give up some of its gains.

*WALLER: If appropriate, would support an early rate cut

*FED’S WALLER: Current batch of data “requires action”

*WALLER: It's important to start cutting rates at the next Fed meeting

In the face of weak data, experienced macro observers would certainly advise against stoking panic or overreacting. If officials intervene too much at this stage, the liquidity benefits of any rate cuts will be quickly offset by concerns about a severe economic recession. , therefore, after Waller gave a cautious response after the non-farm payrolls report, Treasury Secretary Yellen immediately expressed his stance, making it clear that the U.S. economy was still "sound" and heading towards a "soft landing."

"We're seeing the heat subside in terms of hiring and job openings, but we're not seeing significant layoffs," Yellen said at the Texas Tribune Festival in Austin. "We remain alert to the downside risks to the job market, but I think we're What we are seeing now, and what we hope to continue to see, is a good and solid economic situation."

The bond market is extremely forward-looking, and interest rate futures quickly lowered expectations for a rate cut at the September FOMC meeting to 25 basis points following the comments from Waller and Yellen, but as the slowdown in the U.S. economy accelerates, prices reflect a probability of around 80% for a 50 basis point rate cut at both the November and December meetings.

As expected, this is bad news for stocks and risk assets. The Nasdaq fell 3% and the SPX fell 2% for its worst week since 2023, while the VIX has rebounded to 25 as macro assets fell across the board.

Amid the current stock market decline, U.S. stock holdings by both retail investors and professional fund managers are at high levels, with the Wall Street Journal reporting that U.S. households have now allocated more than 40% of their wealth to financial assets, a record high, while long-only asset management firms remain firmly long the SPX index even after the August pullback.

The combination of a slowing economy, record long positioning, and September’s typically weaker stock market seasonality has us taking a cautious view of how the market will perform in the near term.

As we mentioned earlier, for the cryptocurrency market, the results of the non-farm payroll data must be almost perfect in order to drive the market up. However, the final result was quite bad. The shift in risk sentiment dragged BTC down to around $54K and ETH down to $2.2K, falling again by about 6% last week, continuing its recent poor performance.

ETF fund flows remain disappointing, with the BTC ETF seeing outflows of $170 million last Friday, marking eight consecutive days of outflows, and the ETH ETF also seeing outflows of $6 million on the same day. Since its launch in July, the cumulative flow has been declining sharply, and there is currently no clear sign of improvement.

Additionally, rising implied and realized volatility has weakened the current risk-reward performance of cryptocurrencies, and their lack of risk diversification properties (high correlation with SPX) makes it difficult to drive capital inflows.

Glassnode’s on-chain analysis paints a similar picture, with downward pressure increasing and unrealized losses continuing to accumulate. As expected, hedge funds are building short positions in BTC and ETH relative to asset managers’ long positions, with expectations that crypto market sentiment will continue to be challenged and liquidation pressures will rise significantly as BTC approaches $50,000.

Given the lack of positive catalysts ahead, we expect risk exposure to be further reduced in the coming week. The focus this week will be the US election debate on Tuesday, as well as intensive inflation data (including US and China) and global central bank talks (ECB resolution, RBA and BOJ talks). We are cautious about risk exposure and expect that the stock market may remain weak this week and continue until the FOMC meeting.