SignalPlus Macro Research Special Edition: Dog Days of Summer

Last week was a painful week for macro trading, with many market-favored trades (such as tech stocks, USD/JPY, etc.) experiencing significant unwinding, while the actual volatility of SPX surged to its highest level in a year.

Although there was no single catalyst, President Biden's withdrawal from the election coincided with various unwinding of the "Trump trade," particularly in the stock market. Additionally, the "great rotation" continues at full speed, as stock market investors shift from growth stocks to small caps ahead of earnings season, with options traders' bullish sentiment on small caps reaching its highest level in nearly 20 years (based on risk parity measures).

Economic momentum is also beginning to further deteriorate, with the global economic surprise index at its lowest level of the year, and after last month's non-farm payroll data release, the Sahm recession index's probability of recession has risen to 80%. This index measures the gap between the 3-month average unemployment rate and the low point over the past year, with the current reading at 0.43%, very close to the 0.5 threshold, which signals that the economy is about to enter a recession.

At the same time, easing inflationary pressures have opened the door for the Federal Reserve to cut interest rates, with the PCE price index falling to 2.5% year-on-year last Friday, moving towards the Fed's long-term target of 2%. Average hourly wage growth has also fallen from a peak of 6% in 2022 to 3.9% last month, consistent with trends of labor slack and a slowing job market.

Recent developments have prompted some macro observers to call for the Fed to cut rates earlier than the market expects. Pimco's former CEO and CIO Mohamed El-Erian expressed the view that if "useless noisy data delays rate cuts until after September," a soft landing may fail. Former New York Fed President Bill Dudley also stated that the Fed needs to cut rates as soon as possible, as "waiting until September to cut rates would unnecessarily increase the risk of recession."

That said, the market sees the more likely scenario as the Fed remaining on hold this week (with a probability of a rate cut <5%), while the pricing for a rate cut in September is slightly above 100%, indicating that the market has begun to consider the possibility of a 50 basis point cut in September.

In addition to the Fed, there are two major central bank meetings this week: the Bank of Japan and the Bank of England. The market generally expects the Bank of Japan to keep rates unchanged but to further reduce the scale of asset purchases to allow long-term yields to rise further. On the other hand, the market expects the Bank of England to cut rates by 25 basis points, but among the 32 economists surveyed by Bloomberg, 8 expect rates to remain unchanged. Both central bank meetings could produce surprises, and interest rate volatility is expected to increase this week.

Aside from the central bank meetings, this week is also U.S. employment data week (ADP, JOLTS, NFP), and Amazon, Apple, Meta, and Microsoft will all release earnings reports between Tuesday and Thursday. All of this is happening at a critical moment when the Nasdaq is at an important technical support level, and thin liquidity during the summer may further exacerbate volatility.

In the cryptocurrency space, the much-anticipated Nashville meeting with Trump had a somewhat lackluster outcome. As expected, his attendance felt more like a campaign and fundraising event, and any hope for specific details to be announced (such as purchasing BTC as a strategic reserve) was unrealistic. That said, the former president still made some "feel-good" comments, such as "I am making plans to ensure that America becomes the global capital of cryptocurrency, the world's Bitcoin superpower," and named the Winklevoss twins, describing them as "brainy male models," which remains relatively positive for the long-term narrative of cryptocurrency.

Additionally, Bloomberg reported that cryptocurrency donations for the 2024 election have already surpassed the total of all previous cycles (including the FTX/SBF era). Since announcing the acceptance of donations in May, Trump's campaign team has received over $4 million in cryptocurrency donations. Republican Senator Cynthia Lummis stated that she plans to draft a bill requiring the government to hold 1 million BTC over five years and keep it for 20 years (although this bill is unlikely to pass in Congress).

BTC has returned to the familiar price range of $67,000, having fluctuated within this range since March. Furthermore, after Trump's speech, we saw the market aggressively short BTC implied volatility. We may need to gather more clues from the Fed and other central banks' shifts to have a chance to attempt to push BTC above $70,000 again in the fourth quarter.

Wishing everyone successful trading in this long and hot summer!