With the Nasdaq now already in correction territory after last week’s swoon, futures are pointing to further losses of about 4% on Monday and S&P500 futures are down 2.5% ahead of the bell.
The VIX “fear index” of U.S. equity volatility soared – topping 40 for the first time since the 2020 pandemic lockdowns. A reflection of a reversal of risky bets, Bitcoin plunged 15% from Friday’s levels, the Swiss franc surged to its best level of the year – but gold fell, curiously.
U.S. stocks’ eye-watering retreat last week came in the thick of a noisy and somewhat disappointing Big Tech earnings season, with fears about an overspend in artificial intelligence and the lack of an end result yet gnawing at investors.
But the return of U.S. recession worries to a market overwhelmingly priced for a “soft landing” of the economy was the biggest game changer – following a series of weak manufacturing and labor market updates.
If past precedents on the pace at which the U.S. jobless rate is rising are applicable – and many think persistent post-pandemic labor market distortions mean they are not – then a triggering of the so-called “Sahm rule” recession flag on Friday was a moment.
Even though the rule’s author, former Federal Reserve economist Claudia Sahm, played down the warning this time around, the calculus of a half-point rise in the three-month average jobless rate above the low of the past year stands as a warning nonetheless.
So much so, interest rate markets have scrambled.
Fed futures markets now see a half-point cut in Fed rates as soon as next month and as much as 125 basis points of cuts by yearend.
JPMorgan Now expects the Fed to cut rates by 50 bps at both September and November meetings, followed by 25-bps cuts at every meeting thereafter.
With U.S. 3-, 10- and 30-year auctions this week, Treasury yields and the dollar have plummeted. Ten-year U.S. yields fell below 3.7% for the first time in more than a year, and have tumbled about 50bps this month already.
Two-year yields fell as low as 3.69% and the two-to-10-yield curve steepened to within a whisker of positive territory for the first time in over two years – seen by some as a warning sign of recession ahead after two years of inversion.
Riffing over pumped-up Fed easing talk, the dollar index touched its lowest since March.
Critical now will be readings from the U.S. service sector later today, a reality check from Fed speakers and also the release of the Fed’s quarterly senior loan officer survey.
