Monday Meltdown
If you had any faith in a newfound depth and functioning to modern markets, yesterday’s session should have been more than enough to destroy it. As we highlighted early on in the session in our daily brief yesterday, the path of the Fed was in focus over the weekend. More than that, despite only publishing its latest decision on Wednesday last week, questions abounded about whether the Fed had already fallen behind the curve. For much of this cycle we have seen the Fed be led by the market arguably to a greater extent than is normally observed. Yesterday’s market tantrum is made all the more concerning by the fact the Fed published a decision in line with that of the market only a few days ago.
It wasn’t a perfect storm but the potential for such a move had been growing. The Fed had been increasingly referring to its dual mandate. This was a reference to the central bank’s comments that it has a responsibility to ensure full employment as well as price stability. It was such comments that could have made financial markets more sensitive to labour market data. Friday’s release of non-farm payroll data which showed a spike in the rate of unemployment and fewer jobs added in July than expected was therefore able to ignite volatile and value destroying price trends over the past two sessions.
A collapse in the front end of the US yield curve as well as a repricing of the terminal rate has created global market volatility. I severely hope those calling for a pre-September meeting cut will be proved wrong. The past twelve months at which benchmark interest rates have been held at 5.25%-5.5% has been the longest in duration in nearly two decades that rates have not been adjusted whilst at their peak. An emergency oversized cut would be undeserved based upon what is essentially one weak report. Should an inter-meeting cut not occur, an outsized 50 basis point cut looks almost certain for September. Yesterday’s volatile price action was catalysed by a weak overnight Asian trading session. With more stability evident during the overnight session, hopes for more deserving price action today could be met.
Discussion and Analysis by Charles Porter
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