Fed Rate Cuts Hope (re) Emerge...
- Marc Bentin
- 5 days ago
- 7 min read
Updated: 3 days ago
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US stocks saw additional broad-based weakness last week despite a “goldilocks” Nvidia report and anecdotal evidence that the Job market remained resilient last September.
Global liquidity conditions and risk appetite were also impaired by a sharp decline in JPY and Japanese bond markets, in response to Japan’s new Prime Minister S. Takaichi unveiling a much larger fiscal spending package than originally expected (of USD135bn) in an effort to stimulate the local economy.
With the AI trade remaining out of favor, the credit default swap rate of ORCL printed a new high at 118bps and Nvidia shed -7% while risk appetite was further dented by a sharp selloff in cryptos.
On the US data side, the US trade deficit dropped by 24% to USD59.6bn in August, following D. Trump’s sweeping global tariffs.
While US home prices were flat in October, they reportedly dropped in more than half the nation (with weakness more pronounced in Florida and Texas), the largest such proportion since the great financial crisis.
The US economy also reportedly added more jobs in September (old data) with Non-Farm payrolls gaining 119k (vs. 50k expected) although earlier July data were revised down. The unemployment rate edged up to 4.4%, the highest since October 2021 with average hourly earning rising less than expected (by 0.2% vs. 0.3% expected). Interestingly, Ford Motor CEO said that he cannot find enough skilled mechanics (paid USD120k/year in the US) with similar shortfalls reported for truckers, plumbers and electricians and 1mio critical job openings that cannot be filled, pointing at an inadequacy of labor.
The “general impression” conveyed from recent data remained one of a weakening job market. “The job market is at stall speed with jobless claims rising and layoffs increasing that warrant another 25bps cut when the Federal Reserve meets next month”, said Christopher Waller, widely heard as likely to succeed J. Powell as the next Fed Chairman (D. Trump said he will likely announce his choice before Christmas). “I am not worried about inflation accelerating or inflation expectations rising significantly”, Waller added, saying his focus is on unemployment. New York Federal reserve President J. Williams also expects the central bank to cut rates “in the near term” as labor market weakness poses a bigger economic threat than inflation, he said.
More than anything else, it is mounting stress in equity and (private) credit markets (OWL), that likely drove rising Fed rate cuts odds, more than presumably abating inflation pressures and it is fair to say that the Federal Reserve stood closer to capitulation last week than the week before…which help sooth market concerns on Friday.
While US tech remained jittery for most of last week (besides Friday), one tech stocks continued to shine, GOOG which rallied at some point 7% on Wednesday, adding to its recent gains, after Berkshire reported last week end that it kept trimming its Apple holdings in favor of building a $4.3bn stake in Alphabet, making it one of its top ten US stock positions. The likely reason why Berkshire likes GOOG now is its reduced reliance on Nvidia chips by using its own custom AI chips which are cheaper, more power efficient for specific workloads and less capacity constraining than Nvidia’s GPUs. This is shielding GOOG from much of the concerns about the overspending on and insufficient amortization of Nvidia chips used by most hyper-scalers.
Elsewhere in China, after China’s broad fiscal spending slumped in October by the most since 2021, authorities were said to consider new measures to turn around its struggling real estate market with discussions held about providing new home mortgages subsidies for the first time nationally.
US (government) bond yields dropped slightly (while European bond yields crept higher) last week, leaving the dollar index mostly unchanged (while EM currencies were generally weaker).
Gold and silver witnessed another volatile week but ultimately gained 2% and 4% over the period.
In contrast, the crypto market selloff showed no sign of abating last week with bicoin erasing its gains for the year, dropping below 90k (at 87k), shrinking the total market capitalization of cryptos by USD1.2trn from its earlier peak. Eric Trump, the executive Vice President of Trump Organization said “ I laugh honestly (at questions regarding the recent pullback). Like, I laugh because it is almost not a serious question…We’re dancing in that region…I’ll take that volatility if I can get more return. And I think that is how crypto people are wired….”. I am not sure Michael Saylor (who doubled down a week ago buying an additional USD935mn for his bitcoin Treasury company, issuing equity and debt to finance additional purchases of the cryptocurrency) is laughing with the performance of MSTR but who knows… The performance of cryptos has now become a key gauge for risk appetite. Gone seems to be the time when bitcoin was seen as the “new gold”, at least not now for its safe haven characteristics.
Geopolitics seemingly took a turn for the better (for those seeking to end the war in Ukraine) with a 28-points peace agreement being proposed for negotiation between the US and Ukraine (which European authorities were informed of via social networks). The plan foresees to rule out Ukrainian entry into NATO and a NATO agreement not to expand further while Russia would agree not to invade any more countries. Ukraine would receive security guarantees but with an obligation to cap the size of its army and concede the loss of territory now occupied by Russia. The plan was criticized for looking like the Kremlin’s wish-list and full capitulation of Ukraine and of its regime which the proposed plan also requested to hold elections shortly after the peace deal agreement.
This contrasted with the mercurial tone held earlier last week by a French General calling on France to make the ultimate sacrifice “to lose its sons”, causing a wave of indignation in France (and elsewhere). Psychiatrists interpreted those words as being a case study for opinion management and sideration aimed at pronouncing a phrase violating an ultimate taboo (“death of children”) with the objective of bugging the brain, triggering anger and fear to ultimately accept to take “protective measures” (such as raising taxes in a near recession to send more money towards Ukraine and finance a “Keneysian” effort with war preparations) that would otherwise have been deemed unacceptable. The logic was said to be one of “mass (political) hypnosis” and was rather unanimously rejected (see interview of Luc Ferry, a French Philosopher and former Education minister of J. Chirac).
The agreement was discussed in Geneva over the week end with the US President calling for a formal agreement (and soft deadline) towards the end of this week.
Over the past week, the S&P500 gained 0,1% (14,6% YTD) while the Nasdaq100 dropped -0,1% (19,1% YTD). The US small cap index dropped -1,7% (7,5% YTD, Z-score -2,3). AAPL gained 1,5% (8,8%).
The Equally Weighed SP500 dropped -0,1% (6,9% YTD), underperforming the S&P500 by-0,3%. The median SP500 YTD return closed the week at 5,8%.
Cboe Volatility Index rallied 3,9% (14,3% YTD) to 19,83.
The Eurostoxx50 rallied 2,3% (19,3%), outperforming the S&P500 by 2,2%.
Diversified EM equities (VWO) gained 0,6% (24,5%), underperforming the S&P500 by 0,4%.
The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies dropped -0,2% (-4,5%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) gained 0,2% (6,4%).
10Y US Treasuries dropped 5bps (-42bps) to 4,15%. 10Y Bunds climbed 5bps (35bps, Z-score 2,0) to 2,72%. 10Y Italian BTPs climbed 4bps (-5bps, Z-score 2,6) to 3,47%, outperforming Bunds by -1bps.
10Y French OAT's dropped 0bps (26bps) to 3,46%, outperforming Bunds by -5bps.
US High Yield (HY) Average Spread over Treasuries dropped -5bps (4bps) to 2,91%. US Investment Grade Average OAS was unchanged (2bps) to 0,89%.
In European credit markets, EUR 5Y Senior Financial Spread dropped -2bps (-5bps) to 0,59%.
Gold rallied 2,1% (55,6%) while Silver rallied 4,7% (75,0%). Major Gold Mines (GDX) rallied 5,0% (124,6%).
Goldman Sachs Commodity Index gained 0,3% (7,4%). WTI Crude gained 0,6% (-16,2%).
S&P future +36 points; Hong Kong +1.3%; Nikkei closed; China -0.5%
US futures are gaining with sentiment healing as optimism grew over potential Federal Reserve interest-rate cuts following last week’s rout in risk assets. NVDA also gained 1% overnight after reports that US officials held talks on whether to allow selling its H200 AI chips to China.
Oil dropped dropped slightly (to USD58) as traders weighed the prospect of a Ukraine-Russia peace deal.
President Donald Trump’s proposed Nov. 27 deadline to secure Ukraine’s support for a US-backed peace plan isn’t set in stone and could drift into the following week, US Secretary of State Marco Rubio said, suggesting that plenty of work remains.
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