SignalPlus Macro Analysis Special Edition: On the Precipice?

Last week's disappointing non-farm payroll data once again raised concerns in the market about an impending economic recession, and the market increasingly believes that the Federal Reserve is behind the yield curve, leading to the worst single-week performance for the U.S. stock market since March 2023, while yields closed near their lowest levels of the year.

Non-farm payrolls increased by only 142,000 (expected 160,000), with the previous value revised down by 89,000, and the unemployment rate remained at around 4.22%. The weak data caused the three-month average of new jobs to fall below 100,000, marking the weakest quarterly trend since 2012. Suddenly, the growth rate in the private sector is retreating to levels not seen in over a decade, and a recession seems more imminent than ever.

The reaction in asset prices was as expected, with U.S. Treasuries showing a steepening bull trend, the 2-year yield falling by as much as 12 basis points, and the 2/10s curve steepening by 6 basis points, finally reversing into positive territory. However, the stance expressed by Fed Governor Waller was unexpectedly "balanced," not clearly stating whether to cut rates by 25 or 50 basis points in September, which led the fixed income market to give back some of its gains.

WALLER: Will support an early rate cut if appropriate

FED'S WALLER: Current data "requires us to take action"

WALLER: It's important to start cutting rates at the next Fed meeting

In the face of weak data, seasoned macro observers would certainly advise against inciting panic or overreacting. If officials intervene excessively at this stage, any liquidity benefits from rate cuts would quickly be offset by concerns about a severe economic downturn. Therefore, after Waller's cautious response to the non-farm payroll report, Treasury Secretary Yellen promptly stated that the U.S. economy remains "robust" and is moving towards a "soft landing."

Yellen stated at the Texas Tribune Festival* in Austin: "We see a cooling in hiring and job vacancies, but we are not seeing significant layoffs." "We remain vigilant about the downside risks to the labor market, but I believe what we are seeing now, and hope to continue seeing, is a good and robust economic situation."*

The bond market is highly forward-looking. Following the remarks from Waller and Yellen, interest rate futures quickly adjusted the expectation for a rate cut at the September FOMC meeting down to 25 basis points, but due to the accelerating slowdown in the U.S. economy, prices reflect an approximately 80% chance of a 50 basis point cut at both the November and December meetings.

As expected, this is bad news for stocks and risk assets. The Nasdaq index fell by 3%, and the SPX index dropped by 2%, marking the worst single-week performance since 2023. As macro assets fell across the board, the VIX index has rebounded to 25.

Amid the current stock market decline, both U.S. retail investors and professional fund managers have high holdings in U.S. stocks. The Wall Street Journal reported that American households have now allocated over 40% of their wealth to financial assets, setting a record high, while bullish asset management firms remain firmly long on the SPX index even after the pullback in August.

The combination of economic slowdown, record bullish positions, and the seasonal factors that typically lead to poor stock market performance in September compels us to maintain a cautious outlook on the market in the short term.

As we mentioned earlier, for the cryptocurrency market, the non-farm payroll data needed to be nearly perfect to drive the market upward. However, the final result was quite poor, and the shift in risk sentiment dragged BTC down to around $54K, while ETH fell to $2.2K, dropping about 6% last week, continuing its recent poor performance.

ETF fund flows remain disappointing, with BTC ETF seeing an outflow of $170 million last Friday, marking eight consecutive days of outflows. The ETH ETF also experienced an outflow of $6 million that day, with cumulative flows sharply declining since its launch in July, and currently, there are no clear signs of improvement.

Moreover, the rise in implied and actual volatility has weakened the current risk-return profile of cryptocurrencies, and their lack of risk diversification characteristics (highly correlated with SPX) makes it difficult to attract inflows.

Glassnode's on-chain analysis also depicts a similar situation, with increasing downward pressure and accumulating unrealized losses. Unsurprisingly, relative to the bullish positions of asset managers, hedge funds are establishing short positions in BTC and ETH, and as BTC approaches $50,000, sentiment in the cryptocurrency market is expected to remain challenged, with liquidation pressure likely to rise significantly.

Given the lack of positive catalysts in the future, it is expected that risk exposure will further decrease in the coming week. This week's focus will be on Tuesday's U.S. election debate, as well as a series of inflation data (including from the U.S. and China) and global central bank discussions (ECB decision, RBA and BOJ talks). We maintain a cautious stance on risk exposure, expecting the stock market to remain weak this week, continuing until the FOMC meeting.