Upon initial analysis, the NFPs may not appear to be weak, but a closer look reveals that the anticipated buying squeeze was short-lived. Despite initial speculations about a 50bp cut in September, the actual odds of this happening remained stagnant at 30%. This lack of movement in the odds follows a previous policy mistake in July when a cut was not implemented. Subsequent calls for emergency cuts by prominent figures like Siegel further clouded the outlook for the market.
Amidst ongoing disinflation and the conclusion of the Jackson Hole inflation talks, it is evident that the job market is steadily deteriorating. Despite assurances of orderliness, the situation calls for decisive action from the Fed. The recent stock market dip can be attributed to an influx of selling following Waller’s mention of a potential 50bp cut. The lackluster data of the past week raises concerns about how the market will perceive upcoming cuts.
Market rates currently reflect a deteriorating economic landscape, signaling the need for more aggressive rate cuts. While a 25bp cut in September is expected, it may not be sufficient to address the challenges faced by the job market. The consensus of a 125bp cut by December suggests a growing realization of the need for more substantial interventions. The ongoing underperformance of the Nasdaq and the reliance on financials and defensives to support the S&P 500 further underscore the underlying fragility of the market.
As we look ahead, it will be crucial to monitor the performance of banks, particularly in the context of upcoming data releases and events like Apple’s product launch. The possibility of an inverted head and shoulders pattern forming in the S&P 500 remains speculative at this stage, with key indicators like Wednesday’s CPI data yet to be released. Clients are advised to closely follow developments in the VIX and other pertinent market indicators to make informed decisions in the current economic climate.