Macro setup into the Sept 2024 FOMC: rate cut odds and the 2007 parallel
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Walks through the key US data week and the 2007 rate-cut parallel. Cites CME odds of 59% for 25 bps and 41% for 50 bps, expects volatility but a 25 bps cut, and flags idle stablecoin liquidity as potential firepower.
Key claims
CME: 41% for a 50 bps cut, 59% for 25 bps
4 of 7 first cuts after a pivot were 50 bps
Fed cut 7 times from Sept 2007 to Apr 2008, from 5.25% to 2%
Markets are down bad and we are rekt (again) entering this decisive week.
The last set of key US Jobs data before the highly anticipated FOMC in two weeks (rate cuts) is about to drop.
Uptember 📈 or Rektember 📉 ?
The answer lies in the data 📊⤵️
1/ Boomer markets declined across the board yesterday.
The move was led by a sharp drop in @Nasdaq markets after @Nvidia received a subpoena from the DOJ in an escalating antitrust investigation.
$NVDA dropped almost 10% as a result.
2/ The broader market decline is also fueled by fears of a recession in the US.
Weak manufacturing data renewed these fears, also leading to crude slipping by almost 5% too.
Asian markets are all red (see below).
3/ With a busy week ahead in terms of economic data, I expect more volatility.
The key event is definitely the unemployment rate data on Friday.
However, in current market people are likely to watch all of these numbers closely.
What do they mean (for $BTC)? 🤔👇
☞ ISM Manufacturing PMI (Tuesday): A key indicator of manufacturing sector health, influencing investor sentiment toward Bitcoin if it signals economic strength.
☞ JOLTS Job Openings (Wednesday): Reflects labor market health; high openings may suggest a strong economy, affecting Bitcoin through inflation or growth expectations.
☞ ADP Nonfarm Payrolls (Thursday): Private employment data that could raise expectations of tighter monetary policy, impacting Bitcoin’s role as an inflation hedge.
☞ Jobless Claims (Thursday): Low claims may signal economic stability, potentially influencing Bitcoin if investors adjust based on economic conditions.
☞ ISM Services PMI (Thursday): Measures services sector health, with potential ripple effects on broader market sentiment and Bitcoin prices.
☞ Nonfarm Payrolls (Friday): A critical employment measure; strong growth may lead investors to reassess Bitcoin if seen as a speculative asset.
☞ Unemployment Rate (Friday): Released with Nonfarm Payrolls, it shapes economic policy expectations, possibly affecting Bitcoin due to monetary policy shifts.
☞ Average Hourly Earnings (Friday): Key for inflation expectations; rising earnings could boost Bitcoin’s appeal as a hedge against inflation.
4/ While many expect the data to be unfavourable, a surprise gain in jobs added (dropping unemployment rate), would definitely help to reduce recession fears, likely having a positive impact on markets.
It's not looking great though.
x.com/KobeissiLetter/status/1830345886456484274
5/ The data will also have an impact on the Fed's strategy going forward.
Rate cuts in September are already a given based on market expectations.
The Fed clearly signalled potential rate cuts over the next four years at the Jackson Hole symposium a few weeks ago.
The question is just how much the rates will be cut.
25bps? 50bps? More?
Historically, 4 of the 7 first rate cuts (after a pivot from raising) were 50 bps and two banks today (CITI & Deutsche Bank), laid out a path to 50 bps cuts by the Fed today.
In the meantime, CME market watch shows a probability of 41% for a 50 bps cut & 59% for a 25 bps cut.
6/ Is @Polymarket mispricing this?
Maybe we can make some money by betting on 50+ bps cut on @Polymarket kek.
7/ But back to more serious matters.
What is frightening, is the impressive similarities with the interest rate environment in 2007.
Fed interest rates were 5.25% at the timing of the first-rate cut.
Subsequently, the Fed cut rates 7 times between Sept 18, 2007, and April 30, 2008, reducing the rate to 2%.
Today, Fed rates are 5.25-5.5%, with rate cuts expected to begin on September 18th.
Current probabilities indicate 9 potential cuts, lasting through Sept 17, 2025, reducing the rate down to 3.25-3.5%.
See for yourself what happened to the S&P500.
The below chart is from @brett_eth and based on CME's fed watch probabilities.
8/ Why do fed rates even matter?
The federal funds rate (fed rate) is the target interest rate range at which commercial banks borrow and lend their excess reserves to each other overnight, which is set by the Federal Open Market Committee (FOMC).
Fed interest rate changes impact financial markets and the economy by influencing borrowing costs, spending, and investment.
Rate hikes make borrowing more expensive, slowing economic growth and reducing inflation, which can lower stock prices and discourage investment in riskier assets.
Rate cuts make borrowing cheaper, stimulating economic activity and boosting asset prices, but can also raise inflation.
Markets react to rate changes as they affect corporate earnings, consumer spending, and investor sentiment.
9/ The expected rate cut is suggesting increased market liquidity in the upcoming months.
That is basically bullish.
So why am I drawing these bearish comparisons to the meltdown in 2007?
As already explained before, a lot currently hinges on the US economy and whether it is actually sliding into a recession.
If we continue to see weak economic data, the Fed might be forced to implement an emergency cut (>50bps).
That would be perceived as confirmation by the market that the Fed is anticipating a longer term recession, which would lead stocks, and subsequently crypto, to fall.
However, historically the S&P 500 performance after the first rate cut is primarily skewed to a positive performance. There is a wide range of outcomes though, which proves that circumstances matter.
10/ The effect of rate cuts also differs based on the sectors of the economy.
Tech stocks (stock class that is correlated with crypto the most) have historically performed pretty strong on average, following a first rate cut after Fed policy pivot.
So, what's the conclusion here?
It's hard to pin down where the market will move considering the macro uncertainty, the recession fears and the upcoming presidential election in the US.
I definitely expect a lot of volatility in the next weeks and months.
On the 18th at the FOMC meeting, the Fed will cut interest rates.
However, the Fed has to balance the economic impacts that come with that, which is difficult.
☞ A rate cut that is too small might fail to achieve the policy goals.
☞ A rate cut that is too high might be perceived as a panic reaction and create more fear.
Personally, I believe (or hope) the jobs data is neutral or even slightly positive (hard tho) and the Fed cuts the interest rate by 25bps.
Coupled with a path forward that includes more rate cuts in the future, the overall market sentiment could start to improve by the end of the month and benefit risk-on assets like tech stocks or crypto.
If the presidential election also goes our way (whatever that means to you lol), markets could see further relief.
That might be the moment when all the stablecoin liquidity in the market gets allocated.
Stablecoin market cap increases have historically often coincided with strong crypto PA. However, currently this capital remains without providing buying pressure on the order books.
Keep in mind though that this “firepower” could reach the market at any time.
Overall, I'm still bullish (or try to be).
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