I suppose this goes without saying, but just in case: You’re not going to be able to get a “clean” read on the state of risk appetite or the market zeitgeist more generally for a little while longer yet.

The price action following VaR shocks like the one seen across August 2-August 5 tends to be very erratic, characterized by outsized intraday swings and outwardly inexplicable reversals.

I don’t want to say it’s best to just ignore it all for a while but… well, there it is. I just said it.

Of course, I won’t be ignoring it. I can’t. And a lot of you can’t either, whether because your job demands you stay “plugged in” or because you can’t shake the psychological compulsion to “check on things” even in retirement.

If you must remain engaged, you should at least avoid the temptation to attribute causality where there isn’t any. Witness this headline from one mainstream financial media outlet on Thursday afternoon in the US: “S&P 500 rebounds 2% as recession concerns ease.”

The downtick in jobless claims aside, “recession concerns” — and this assumes you can define and quantify “concerns” — no more “eased” between 9:30 AM and 4:00 PM in New York on August 8 than they did intensify from 1:00 PM to 4:00 PM on August 7 (when equities erased intraday gains to close red after a poor 10-year auction). What you’re seeing on your screens is flow-driven price action in an August tape that’s probably even more illiquid than it would be otherwise given constraints on risk budgets and dealer balance sheet caution in the wake of Monday’s earthquake.

To be sure, market pricing for Fed cuts has eased (no pun intended). But it still reflected in excess of 100bps worth of cuts by year-end. That’s a 50 in September and back-to-back 25s, probably. I don’t know how to think about that at this juncture:

• On one hand, the “selloff” wasn’t even a proper selloff in the US. And taking a step back from the Sahm panic, 4.3% UNR and 114,000 NFP (170k 3MMA) doesn’t exactly scream “Cut rates!”
• On the other hand, the last few days did have a kind of “breaking point” feel to them, and having escaped two such episodes largely unscathed thus far (the US regional banking crisis and the gilt crisis in the UK), the Fed may want to be careful about pushing its luck any further, particularly considering terminal was reached over a year ago.

So, I could see this going either way, unsatisfying as that is for those of you looking for answers.

The Fed’s not exactly famous for staying ahead of the curve. They tend to drive in the rearview mirror, fight the last war and so on. They’re still fighting the last war on the inflation front, even considering the shift in the language around the balance of risks in the July policy statement, and I don’t think there’s anything like consensus on the Committee currently for a 50bps move in September.

That said, I do think Powell could get that consensus between now and then assuming CPI cooperates and assuming he does indeed want to go “big” out of the gate. But it’s going to take more than a one-day meltdown on the Nikkei and a shallow pullback on Wall Street to get him to a place where he thinks a half-point cut’s warranted, particularly given the God-awful optics of delivering a chunky rate cut with just weeks to go until a highly (existentially) consequential US presidential election. Donald Trump’s already got it in for Powell, despite having hand-picked him for the job. If Powell cuts by 50bps in September, Trump will lose whatever part of his mind isn’t already lost.

In a note out Thursday, SocGen’s equity vol team highlighted the chart below, which is just another version of the front-end inversion chart(s) I’ve used over and over again recently.

The bank’s Jitesh Kumar and Vincent Cassot called that “one of the most accurate recession indicators in the short-term rates world.” I’m not sure what other STIR indicators you’d use (i.e., I’m not sure what’s competing with inversions when it comes to short-end rates recession indicators), but point taken I guess.

As the figure indicates, Kumar and Cassot like that 100bps threshhold. “Even though the market pricing has retraced since [Monday], the current 110bps is still well in the recession category,” they wrote.

If you’re curious how other assets (i.e., outside of the rates complex) are pricing US recession risk, the answer is that they’re more cognizant now than they were before the VaR shock, which is so self-evident that it’s probably not worth mentioning.

The figure below is an updated version of JPMorgan’s cross-asset recession probabilities. They’re still low outside of rates and base metals.

As quick reminder, the bank derives those probabilities by comparing the current cycle peak-to-trough moves to those witnessed in and around historical economic downturns.

Do note: Those probabilities for the S&P, IG and junk credit in mid-June (so, less than two months ago) were 0%, 2.1% and 2.2%, respectively.

In the same Thursday missive cited above, SocGen’s Kumar and Cassot spoke to the overshoot optic in rates vis-à-vis a US macroscape which, while certainly indicative of a slowdown, doesn’t look like a recession quite yet.

“STIR markets aren’t waiting around to find out, and that looks very much like an overshoot” if the data doesn’t match the recessionary pricing, they said, adding that “the biggest takeaway from this week’s price action” isn’t necessarily anything about the macro, but rather that “all risk managers will now have to model a 50-point rise in VIX within two business days, forcing every sensible investor to de-leverage.”