CAUTIOUS AND CHOPPY STOCK TRADING THEME

Top things to watch this week

The Economic Calendar: MONDAY: Durable Goods (7:30a CT), Dallas Fed Manufacturing Index (9:30a CT) TUESDAY: Redbook (7:55a CT), House Price Index (8:00a CT), Consumer Confidence (9:00a CT), Richmond Fed Manufacturing Index (9:00a CT), Dallas Fed Services Index (9:30a CT), 2-Year Note Auction (12:00p CT), Money Supply (12:00p CT) WEDNESDAY:  MBA Mortgage Applications (6:00a CT), EIA Petroleum Status Report (9:30a CT), 5-Year Note Auction (12:00p CT), Raphael Bostic Speaks (5:00p CT) THURSDAY: Jobless Claims (7:30a CT), U.S. GDP (7:30a CT), Consumer Spending (7:30a CT), Retail Inventories (7:30a CT), Wholesale Inventories (7:30a CT), Pending Home Sales (9:00a CT), EIA Natural Gas Report (9:30a CT), 7-Year Note Auction (12:00p CT), Raphael Bostic Speaks (2:30p CT), Fed Balance Sheet (3:30p CT) FRIDAY: Core PCE (7:30a CT), Chicago PMI (8:45a CT), University of Michigan Consumer Sentiment (9:00a CT), Baker Hughes Rig Count (12:009 CT)

Key Events:

• U.K. trading holiday on Monday.
• Trading desks are half-staffed as vacation time wraps up with next week’s Labor Day holiday. 
• Nvidia earnings on Wednesday will drive stock prices.
• Economic reports on GDP and the Fed’s fav inflation indicator, PCE.
• Earnings reports are due from Salesforce, Crowdstrike, and Best Buy.
• Many traders are looking forward to the Sept. 6 jobs report.

JOBS REPORT REVISION (FED PIVOT)

Significant downward revision: The Bureau of Labor Statistics (BLS) substantially revised U.S. job growth numbers for the 12 months ending March 2024.

• Largest revision in years: This revision, totaling 818,000 fewer jobs, is the most significant since the global financial crisis.
• Revised trend: While the overall trend remains positive, the downward revision suggests a less robust labor market than previously reported.
• Impact on monetary policy: The weaker job numbers strengthen the case for a September rate cut by the Federal Reserve, which last week’s FOMC minutes already hinted at.

Key Takeaways: The WSJ’s reporter and Fed mouthpiece, Nick Timiraos, noted that a report as weak as July might lead to a cut of more than 25bps. The BLS job number revision has significantly impacted the perception of the U.S. labor market and increased the likelihood of a Federal Reserve rate cut. While the overall trend remains positive, the revised data highlights the need for continued monitoring of economic indicators. FED CHAIR POWELL: ‘THE TIME HAS COME FOR POLICY TO ADJUST’ || ‘WE DO NOT SEEK OR WELCOME’ FURTHER COOLING IN LABOR MARKET CONDITIONS

STOCK INDEX FUTURES

The overall bull trend remained intact, as the S&P 500 was higher by +1.41% for the week, and the Nasdaq 100 was up by +1.05%. Performance of various sectors over the past week (5 trading days): Strong Sectors – Utilities: +1.32%, Real Estate: +3.66%, Consumer Discretionary: +2.59%, Materials: +2.38%, Industrials: +1.82%; Weak Sectors – Energy: -0.09% The Bull Case:

1.  Earnings growth is stronger than expected;
2. The US economy will remain durable;
3. The Fed is set to deliver 200 bps of rate cuts over the next 18 months.

The Bear Case:

1. Valuations are still high, and the market bounced remarkably hard off the August 5th lows;
2. We expect that traders struggle with various election outcomes;
3. The narrative around AI is increasingly more two-sided than it was just a few months ago;
4. The Jobs report may come in worse than expected.

INTEREST RATE FUTURES Fed Chair Powell emphasizes the FOMC’s attention to risks on both sides of its dual mandate, particularly the weakening labor market. This could be the “pivot” to provide a stronger argument for rate cuts. Now that Powell has not indicated a rate path, we will watch for a signal of anything more than a 25bp cut, suggesting that the Fed is significantly behind the curve. The next key catalyst and piece of data is the Jobs report on September 6. Powell Jackson Hole Pivot Summary:

• Confirms Sept rate cut
• Does not indicate whether 25bps or 50bps;
• As such, the August payrolls report will be critical

POWELL: ‘WE WILL DO EVERYTHING WE CAN’ TO SUPPORT STRONG LABOR MARKET AS WE MAKE FURTHER PROGRESS TOWARD PRICE STABILITY || POLICY RATE LEVEL GIVES ‘AMPLE ROOM’ TO RESPOND TO RISKS, INCLUDING UNWELCOME FURTHER WEAKENING IN LABOR MARKET || TIMING AND PACE OF RATE CUTS WILL DEPEND ON DATA, OUTLOOK, BALANCE OF RISKS

RATES WHALE TRADE

A large trader is betting on a 50bp rate cut by using a call spread options structure in September SOFR options. The trade risks 0.5bp to make 12bp potentially.

CAUTIOUS AND CHOPPY STOCK TRADING THEME

A theme we are hearing from money managers: “It’s still a bull market, and the primary trend remains higher … but, I expect the trading environment will be choppy over the next three months … where, as distinct from the past month, both the upside tail and the downside tail will be constrained. Therefore, I would stick with the plan to stay in the saddle, simplify your portfolio to the best assets, and hold the reins tight.”

AUGUST 5th MARKET CORRECTION OR FLASH IN A PAN?

The events of August 5th marked a significant correction in the market, but the subsequent rebound suggests it may have been a temporary anomaly. Key factors that contributed to the correction:

• Overvaluation and Leveraged Positioning: The market was at a point where valuations were high, and many investors were using leverage, which can amplify both gains and losses.
• Economic Concerns: A series of weak economic data, including the payrolls report, raised concerns about the economy’s health.
• Central Bank Policies: The Bank of Japan’s policy shift and the Federal Reserve’s rate hike combined to create a perfect storm for market volatility.

While the August 5th correction was a significant event, it’s essential to view it in the context of the broader market environment. The market’s resilience in the face of this shock suggests it may withstand future volatility. However, it’s essential to remain cautious. Stocks on most valuation metrics are still overvalued.

DOLLAR INDEX FUTURES

The dollar index futures fell to their lowest point this year after Federal Reserve Chair Jerome Powell signaled that the long-anticipated U.S. interest rate cut would come next month. The weak dollar also saw the euro hit a 13-month high, and the U.S. currency marked a 17-day low versus the yen. As noted in this note, Powell said, “The time has come for policy to adjust,” given that upside risks to inflation have diminished and downside risks to employment have increased.

CRYPTO FUTURES

Bitcoin futures experienced a significant price surge on Friday, fueled by two positive catalysts:

1. Federal Reserve Easing: Federal Reserve Chairman Jerome Powell’s announcement of a forthcoming monetary easing cycle boosted investor sentiment and drove up Bitcoin prices.
2. RFK Jr.’s Trump Endorsement: Robert F. Kennedy Jr., a known crypto advocate, endorsed Donald Trump, further fostering optimism within the crypto community and leading to additional price gains.

Bitcoin’s price rose by a substantial 5.6% on Friday, reaching $63,800. This increase highlights the market’s sensitivity to macroeconomic factors and political developments that could impact the cryptocurrency landscape.

Asset class performance sheet

These performance charts track the daily, weekly, monthly, and yearly changes of various asset classes, including some of the most popular and liquid markets available to traders.

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