The plethora of high impact risk events from last week will be digested this week. We said in our July monthly review it seemed like a month for the ages and the first couple of days of August didn’t disappoint either. Of course, we are in peak summer market mode, so price action is affected by thinner liquidity. But the under-par US jobs report has seen the market theme move from one about hot inflation to downside risks on the employment side, as Fed Chair Powell highlighted at his press conference last Wednesday. However, we note this is only one NFP report and there could be seasonal and weather effects.
Whatever, the debate has seemingly shifted to how big and how fast rate cuts will come with markets now expecting the Fed to lower borrowing costs by more than a full percentage point by the end of the year. That implies extra large 50bps cuts from at least one of its three remaining meetings. Of course, this is somewhat in contrast to the now rather dated June FOMC median dot plot of just one rate reduction for 2024. Treasury yields plunged last week with six straight days of bond buying, taking yields (which move in the other direction) into oversold territory. The dollar index will look for support just below 103.
With the data calendar fairly thin in the coming days, stocks will try to stem their losses after three consecutive weeks of losses. The VIX, the volatility measure known as Wall Street’s “fear gauge” has jumped above 20, double its year-to-date average and the highest level since the US regional banking crisis in March 2023. Concerns about an economic slowdown have seen classic risk-off plays with sentiment also under pressure from earnings.
Have we seen the end of the rotation from Big Tech into smaller cap companies, if the economy weakens more sharply and undermines profits everywhere? RIP Goldilocks? Goldilocks means a fall in inflation but not a big gap in terms of economic activity. We note yen trades are deeply overbought so a correction could mean some hoped-for market stability, though rising geopolitical won’t offer much help to risk taking.
