There’s something a bit strange about suggesting market participants are nervous.

After all, we’ve just seen a record-large nine-session VIX decline and, more broadly, the speediest equity vol de-escalation ever witnessed. Naturally given modern market structure, the vol crush facilitated a quick rebound in stocks which, as of mid-week, were very close to recovering record highs after erasing a “blink-and-you-missed-it” pullback.

So, “nervous” feels like a misnomer, although I’d note that “spot up, vol up” made a cameo on Wednesday. Remember: Rallies can be “nervous” affairs too.

And yet, peering through the lazy, late-August haze, one does perceive a hint of macro angst heightened, perhaps, by the release of payrolls revisions which showed job growth across the world’s largest economy was far weaker than initially reported from April of 2023 through March of 2024. Indeed, 818,000 was the largest downward revision since 2009, with the caveat that the tally will itself be revised early next year.

“Given that everything was weak in the July jobs report — weak payrolls, rising unemployment, falling hours worked and cooling wages — today’s update will only put more pressure on the Fed,” ING’s James Knightley said. “Momentum is being lost from an even weaker position than originally thought.”

As the figure above shows, the payrolls revision did appear to move markets. Rate-cut pricing for 2024 waxed beyond 100bps again. (And not for nothin’, but those betting market odds I mentioned on Tuesday had 50bps for the September FOMC priced at ¢24 up from ¢16 in just 24 hours. The key there is that a market with ~$5 million bet — Polymarket — isn’t going to be anywhere near as efficient when it comes to pricing Fed outcomes as STIRs, where billions are wagered. Less money means more mispricings.)

Whether the August jobs report is the so-called “Wile E. Coyote” moment or not, my sense is that it’s coming. And I don’t mean that — necessarily — to catastrophize. All I’m saying is that when the labor market gets moving in the wrong direction, it snowballs. That’s one of the defining features of US recessions (probably all recessions, but I’m not as well-versed in non-US macro history).

Some of you have likely seen the figure below. It’s from Claudia Sahm, and it shows how increases in the jobless rate tend to escalate. Three months into a recession, the average increase is a mere half-point. After that, things get very ugly, very fast. As Sahm wrote last month on her Substack, the jobless rate generally peaks three percentage points higher on average.

The blue line assumes June was the “zero month.” Her point in the article was that there’s nothing comforting about the so-far-gradual nature of the jobless rate uptick. “That slow rise is not unusual with the beginning of a recession and is not a reason to downplay the risks,” she said. “The unemployment rate tends to increase gradually in the lead-up to and early months of the recession, then it picks up steam.”

Although Sahm has soft-pedaled the recession signal from her namesake macro rule, she’s all the same adamant that the signal shouldn’t be ignored. That is: Maybe a recession’s imminent maybe it isn’t, but one good way to increase the odds of a downturn is to pretend like everything’s completely fine.

The Fed’s aware of all this. Scoff as you will, but they are. Which is why I happen to believe the bar for a 50bps cut next month is lower than a lot of people are inclined to believe. The July FOMC minutes seemed to support that contention.

Regardless of the size of next month’s move, I tend to think it’s too late. Not too late to engineer some version of a soft landing, necessarily, but too late to avoid a slowdown that’ll check enough NBER boxes to count, in hindsight, as a recession. (I’m not, like most, convinced that a shallow recession can’t still count as a benign resolution. The Fed was facing the most vexing macro quandary in a generation. If they escape with only a minor recession following breakneck rate hikes and more than a year spent at terminal, that’ll be a miracle, and not a small one either.)

Market participants are — or should be, anyway — anxious about that. “After watching this economic cycle survive so many one-in-a-lifetime shocks, the market is collectively on tenterhooks in case this autumn is when the whole edifice falls apart,” SocGen’s veteran FX strategist Kit Juckes said this week.