Upon initial inspection, Non-Farm Payrolls (NFPs) did not appear weak, but the anticipated buying squeeze was disappointingly short-lived due to the fluctuating rate cut odds. Despite Fed official Waller hinting at the possibility of a 50 basis point cut in September, the actual odds remained stagnant at a mere 30%, following Williams’ confirmation of a 25 basis point cut. This situation arose after what I believe to be a clear policy error in July of not implementing a cut and the subsequent call by economist Siegel for an emergency 75 basis point cut in August and another 75 basis points in September.
While disinflation persists and the celebration over inflation at the Jackson Hole symposium fades, the job market is showing signs of steady deterioration. Despite the reassuring statements, a proactive approach by the Federal Reserve is imperative to address the ongoing challenges in the job market, even if it may not materialize in the form of a larger cut in September. The recent downturn in the stock market was not solely caused by job market data but was exacerbated by the rush to sell following Waller’s mention of a potential 50 basis point cut before midday.
The recent economic data has not been exceptionally positive, leading to uncertainty regarding how the market will perceive the upcoming rate cut, whether it will be seen as a reassurance or a delayed reaction. Market rates are reflecting the worsening economic conditions, yet the proposed 25 basis point cut is viewed as insufficient by many, given the challenges in the job market. While the mainstream expectation is a cumulative 125 basis point cut by December, the necessity for further cuts may be underestimated presently.
The Nasdaq has been underperforming for weeks, while the S&P 500 has been buoyed by financials, defensive stocks, and other interest rate-sensitive investments. Small-cap stocks and equal-weighted S&P 500 companies are faring slightly better, indicating some resilience in diverse sectors. The upcoming week will be crucial for observing the performance of both large and small banks, as well as monitoring the reaction of tech giant Apple (AAPL) to determine if a tech sector recovery is imminent.
Speculation about an inverted head and shoulders pattern forming in the S&P 500 index may be premature, as the market is currently at the peak of the right shoulder. The development of the right shoulder would require more concrete data, and the release of Wednesday’s Consumer Price Index (CPI) figures may offer further insights. A detailed analysis of the Volatility Index (VIX) and upcoming economic data will provide valuable information for market participants.
The relationship between NFPs, Fed rate cuts, market performance, and economic indicators is complex and nuanced. The ongoing uncertainty surrounding the job market and the effectiveness of rate cuts underscores the need for a vigilant approach to monetary policy and market analysis. By carefully monitoring key sectors and economic data, investors can make informed decisions in a rapidly evolving financial landscape.