SignalPlus Morning Briefing: Uptober? More Like Jobs-tober.
A significantly stronger than forecast NFP raised significant questions on the Fed’s wisdom to cut 50bp last month, as the US economy added 254k new jobs (vs 150k expected), with the unemployment rate falling back down to 4.05% and average hourly earnings staying robust.
The fixed income reaction was furious?—?short-dated treasuries jumped 20bp as the yield curve bear flattened aggressively. 10y yields broke upside resistance at 3.93% and looks to be on the way to print above 4%, while terminal rates spiked 25bp to nearly 4.25%, and rate cutting odds fell back to single 25bp cuts over the next 4 FOMC meetings.
While fixed income struggled, the USD strengthened against all major currencies, and in particular the JPY, after the incoming PM Ishiba appears to be toeing the party line to maintain an easy monetary policy along with new stimulus package plans.
Unsurprisingly, global equities enjoyed another strong week with most indices in the green led by an outperformance in Tech, as the strong economic data, friendly central bank support, and even a timely halt to the US dockworkers strike to give investors full latitude to stay risk-on in the meantime. Furthermore, a record breaking $1.4bln in China inflows (via the FXI ETF) has reignited animal spirits in the world’s 2nd largest economy, adding further fuel to fire in the ongoing risk melt-up.
In retrospect, Powell’s 50bp move is even more dovish when viewed in the historical context, with both inflation and unemployment remaining close to historical extremes in terms of strength. On a standardized basis, PCE is still hovering at around the top 15%-percentile levels while unemployment remains near decade lows. Furthermore, similar to 2020, global central banks are cutting rates while stocks remain on a one-way uptrend, which is causing inflation expectations to?finally?start rebounding higher over the past few weeks.
Technically speaking, charts are looking very positive for US equities, with indices seeing new 52 week highs at a pace rarely seen over the past decade, and other momentum indicators also signaling a breakout higher. Valuations are undoubtedly rich, with SPX forward multiples trading at the highest levels during the start of the Fed easing cycle, but since when did valuations matter for price action anyway?
While the rest of the macro complex are celebrating new highs with the latest soft-land scenario, crypto has suffered mightily and is up to its worst October start since 2019, with BTC trading as low as 60k to begin the month. The rest of the altcoins didn’t fare much better (-10% on the week), as some of the local FOMO energy must be losing out to the surging in A-shares. In fact, Coinglass data reported nearly $500mm in long-futures liquidation over the first few days of October.
ETF inflows have been subdued with a slight recovery on Friday, though the overall trend remains concerning. Furthermore, crypto’s inability to hold on as a ‘risk-hege’ over the latest Middle East tensions have not been noticed, and we will function like a high-beta asset until further notice.
Nevertheless, we do expect the combination of easy monetary policy, strong risk-on sentiment, and a rebound in Trump winning odds (given Kamala’s poor handling of the hurricane recovery efforts) to present a strong Q4 for crypto prices in general. While the journey will likely be choppy, we are encouraged by the recent price action which has seen higher lows on each subsequent sell-off, and will remain patient to wait for new highs on BTC before the end of the year. We are still early in October after all!
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