Last week was a major week for macroeconomic data, starting with the Federal Reserve’s meeting decisions. The meeting summary saw some changes in the wording: significant progress on inflation, relatively moderate employment, and maintaining the current interest rate levels. The market has further priced in the expectation of Fed rate cuts, with the probability of two rate cuts this year increasing. However, this does not appear to be good news: a slew of employment data released this week has shown a comprehensive decline. The new non-farm payroll data fell sharply below the expected 176,000, coming in at only 114,000, and the unemployment rate rose to 4.3%. As we mentioned last month, the “SAM Rule” has been triggered, and recession is set to replace rate cuts as the new trading focus. The market now views the Fed’s rate cuts as bad news because these are recession-induced cuts rather than preemptive cuts.
Accordingly, last week saw a broad retreat in equity markets, from the Nasdaq and Russell 2000 to the Nikkei and cryptocurrencies, all experiencing their largest declines in recent times. However, we believe that while current economic indicators point towards a recession, a true recession is unlikely to materialize within 2024 and may instead emerge in 2025. Similar to how Powell initially underestimated the arrival of high inflation and delayed rate hikes, the Fed’s path to rate cuts may not align with market expectations for preemptive cuts but rather reactive, post-recession measures. Therefore, we do not foresee a clear bullish or bearish market within the year but rather continued high-level volatility.
Cryptocurrencies are currently at a critical juncture. On-chain data shows that a significant amount of Bitcoin (over 900,000 units) is accumulated in the $65,000-$66,000 range. This indicates that many investors are holding at this price level, and despite half a year of volatility, Bitcoin’s price remains near this range. Only significant fluctuations (dropping below $50,000 or hitting new highs) will likely trigger trading actions from current investors. Notably, there have been two previous instances of massive volume accumulation within narrow price ranges, both of which subsequently became historical bottoms for the ensuing market trends, rarely being retested even during pullbacks. It remains to be seen how this current accumulation will impact prices, and we may only understand its full effects after several months of price movements.
This week is a minor one for macroeconomic data, with limited importance, but it will guide the market in the current recessionary trade. Therefore, the significance of these data points will increase in the future.
- The final services PMI data to be released on the evening of August 5 is expected to be 56%, with the previous value at 56%. Based on the current trend, we believe the U.S. economy is still showing a hot services sector and a cold manufacturing sector, leaning towards an above-expected result. Given the current market trading logic, this data could be favorable for equity markets, potentially sparking a rebound during the ongoing decline.
- The ISM Services PMI, released the same evening at 22:00, is expected at 51.4%, with the previous value at 48.8%. Both data points are among the few worth speculating on for cryptocurrency and U.S. stock trades this week.
- The Reserve Bank of Australia’s interest rate decision, to be announced at noon on August 6, is expected to hold at 4.35%, the same as the previous value. Although the market currently expects Australia’s rates to remain unchanged, it is worth noting, given that several countries, including China and the UK, have begun cutting rates.
Overall, we believe the U.S. has not yet entered a full recession, although some data indicate potential recessionary trends. Recession trading is gradually replacing rate cuts as the current market theme. We need to shift our approach to data trading from interpreting bad news as good news to accepting bad news as bad news and good news as good news. Bad data will remain bad data and should not be seen as good just because they support rate cuts.