As you might imagine given the mood (read: blood) on Wall Street and the blaring recession siren from the Sahm rule, US rates turned psychotic on Friday. Stark raving mad.
At the front-end, twos rallied another ~24bps. That’s on top of the 20bps they’d already fallen on the week.
If you’re wondering, the five-session decline — some 45bps — was the largest since 2023’s regional banking crisis, which triggered one of the most dramatic short-end squeezes in living memory.
We’re in three-handle territory on twos now, just a day after 10-year yields slipped below 4% for the first time in months.
Bets on Fed cuts escalated, and that’s putting it politely. The shift in the Fed’s language around the dual mandate — specifically, the Committee’s acknowledgement that it is a dual mandate again, not a de facto single mandate where the inflation fight is all that matters — suggested policymakers are now very sensitive to evidence of a softer labor market a year on from peak rates.
Jerome Powell, in the post-FOMC press conference, emphasized again and again that in the event labor market normalization begins to look like “something more” than the latter stages of a benign rebalancing process, the Fed was prepared to respond.
That was the lens through which traders viewed the data on Thursday and Friday. It magnified the jump in jobless claims, the worrying read on US manufacturing and the two-tenths increase in the unemployment rate, leading to the aggressive dovish shift illustrated (poignantly) below.
That’s ~120bps of priced-in cuts. It’s hard to see how that’s feasible. It’d mean 50s in September and December and a 25 two days after the election. I’m not buying that, or at least not in the absence of evidence to suggest the US economy’s in dire straits or headed there soon.
“[The] market is really taking Powell to the 50bps cut in September and even potentially another 50bps cut thereafter, with total implied easing through December at 115bps, which seems wild,” Nomura’s Charlie McElligott said Friday. “I would love to see some Payers emerge and take a few shots at fading these aggressive cuts.”
“This week’s data do not suggest a rush for the Fed to cut rates aggressively,” SocGen’s Subadra Rajappa said, before conceding that although “the market seems to be overpricing cuts, it might be hard to fade [the] risk-off sentiment [given] rising geopolitical risks, volatile equities [and a] stronger yen.”
remember all those rate cut calls months ago … and then we all made fun of it (and the calls vanished)? … were they right after all or is this another head-fake. … enjoy the ride
Hopefully, Powell will not buckle under pressure from market participants, whether surfacing in popular press articles, behind the scenes from US Treasury Borrowing Advisory Committee, from other sources, etc. No complaints while momo, vol control, correlation/dispersion, etc., etc., funds marched stocks higher. But, true to form, some of Wall Street’s biggest and wealthiest market players are suddenly crying–literally, screaming–for relief. Buy them pacifiers in bulk, Jay, and send them out. Stick to slow, gradual rate reduction plan, maintaining emphasis on “higher for longer.” Time for those who started managing funds since 2010 to learn the Fed does not always bail out markets–and bear markets do happen.
In 2018 from the time Powell said “Long Way from Neutral” to the end of the year, the market as defined by the S&P fell 19%ish. We are less than 6% off the highs. They are going to look hard at employment as they should. That continuing claims keep moving up is not a good thing. The first weekly jobless claim report over 300k will be poorly received. Probably 50 bps down and then the market will really pitch a fit.
60-40, 55-45 allocations are working pretty well this week.
Treasury traders seem even more “Look, Squirrel!” than equity traders. Going from seven cuts to zero cuts to five cuts in a six month span – sheesh. The economic data swings just have not been that dramatic.
Has anyone noticed how the VIX is trading?
Ah these “quiet summer markets!”
Here you go: https://heisenbergreport.com/2024/08/02/vol-complex-goes-bonkers-into-stock-plunge/
H-Man, the consumer is weary. Rode hard, put up wet. If that is correct, the rates have to fall a lot more before it looks better.