The U.S. non-farm payrolls data significantly exceeded expectations. The number of employed people increased by 254,000 (expected to be 150,000). The unemployment rate fell back to 4.05%. Average hourly wages remained strong, which triggered the market's question on the wisdom of the Federal Reserve's 50 basis point interest rate cut last month. doubts.
The reaction in the fixed income market was very intense, with the yield curve sharply flattening, short-term yields rising by 20 basis points, the 10-year yield breaking through the upward resistance level of 3.93%, and expected to exceed 4%, while terminal interest rates soared by 25 basis points. basis points to nearly 4.25%, and the market's expectations for interest rate cuts have cooled down to only 25 basis points of interest rate cuts in the next four FOMC meetings.
While fixed-income markets struggled, the dollar strengthened against all major currencies, especially the yen, which rebounded strongly after Japan's new Prime Minister Shigeru Ishiba said he would maintain loose monetary policy and launch a new stimulus package.
As expected, global stock markets had another strong week, with most indexes rising, with technology stocks particularly strong. Strong economic data, friendly central bank policies, and even a timely halt to the U.S. longshoremen's strike have given investors every reason to remain risk-on. In addition, a record $1.4 billion of funds flowed into Chinese assets through the FXI ETF, adding to the frenzy in the world's second-largest economy and further driving the rise in risk assets.
If we look back at history, Chairman Powell's 50 basis point rate cut will appear more dovish. After all, both inflation and unemployment are still close to extreme levels. On a normalized basis, PCE remains around the top 15% quantile, while unemployment is close to a decade low. Furthermore, similar to 2020, the one-way uptrend in stocks coincided with central banks around the world starting to cut interest rates, which led to inflation expectations finally starting to rebound in the past few weeks.
From a technical perspective, the charts for the U.S. stock market look very positive, with indexes hitting 52-week highs at a rare rate, and other momentum indicators also pointing to breakouts higher. There's no doubt that valuations are very rich right now, with SPX's forward P/E ratio at extremely high levels, but price action isn't necessarily influenced by valuations in the first place.
While macro markets are celebrating new highs and soft landing scenarios, cryptocurrencies have underperformed, having their worst start to October since 2019, with BTC starting the month as low as $60,000, and other altcoins not performing similarly. Not far away (weekly decline of 10%), some local FOMO sentiment seems to be outweighed by the strong gains in A-shares, with nearly $500 million in long cryptocurrency futures liquidated in the first few days of October, according to Coinglass.
ETF inflows picked up slightly on Friday, but the overall trend remains concerning. Furthermore, the failure of cryptocurrencies to serve as a “hedge” asset amid the recent tensions in the Middle East cannot be ignored, and until things change, cryptocurrencies will behave more like a high-beta asset.
Nonetheless, we expect loose monetary policy, strong risk-on sentiment, and a rebound in Trump’s odds due to Kamala’s poor handling of hurricane relief efforts to provide strong support for cryptocurrency prices in the fourth quarter. While the ride may be bumpy, we're still pleased with the recent price action, with each dip hitting higher lows and BTC still having a chance to reach new highs before the end of the year, since we're only just entering October.
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