Whether or not fund managers registered a drop in soft landing odds in recent days, market pricing certainly did.

On Tuesday, BofA released the August edition of the bank’s closely-watched Global Fund Manager survey, and while the responses indicated some incremental consternation about the growth outlook in light of the US recession scare, soft landing buy-in actually hit a new high.

By contrast, soft landing odds — defined as one to three Fed cuts by year-end — as priced by front-end US rates were cut in half last week versus the month-ago highs, from around 80% to less than 40%.

The figure below is from Nomura’s Charlie McElligott. It shows the distribution of SOFR-implied “landing” scenarios and how they evolved over the last three months.

The key takeaway is the sharp increase in hard / “uneven” landing pricing to the detriment of soft landing odds. McElligott used six or more cuts to proxy for hard landing pricing and three to five cuts for an “uneven” landing. The inset shows you the actual numbers. From this time last month to the height of last week’s growth scare, market-implied hard landing odds jumped from nothing to nearly one in three.

As Charlie’s annotations make clear, his take is that it was the repricing of the macro left-tail which catalyzed the vol shock, not the yen carry unwind, which anyway began to manifest weeks (or longer) prior to the theatrics that defined August 1, August 2 and August 5, a day that’ll live in infamy for the largest intraday VIX spike in history and an outright meltdown in Tokyo.

The mainstream financial press hasn’t done the best job of explaining the sequencing and interplay of those two developments (i.e., the carry unwind and the signal from the US macro data). By way of quick explanation (i.e., so you have a kind of CliffsNotes version), I’ll recycle some language from the latest Weekly.

It’s important to understand how a spate of soft US macro data played into August’s short-lived calamity. The situation didn’t spiral on the day of the Bank of Japan decision. Rather, the pressure built up over the ensuing 72 hours, as a very poor ISM manufacturing report (which included a dire read on the survey’s employment gauge) and, ultimately, the recession signal from an unexpected uptick in the US jobless rate, conspired to perpetuate yen strength and torpedo risk sentiment. Japanese shares were down 6% on August 2, before the US jobs report triggered the Sahm rule. The yen rallied nearly 2% that day, capping a 4.7% weekly advance, the fifth straight. The recession read-through from the Sahm rule thus tipped a slow-burning carry crisis over the edge, triggering a full-blown panic into very illiquid conditions when trading resumed after the weekend.

That was the setup for August 5’s two black swans: The Japanese stock crash and an outlier session for the US equities vol complex, where the VIX spiked the most on record and vol-of-vol soared to levels unseen outside of the original COVID crash in March of 2020, the yuan devaluation in August of 2015 and, of course, Volmageddon in February of 2018.