Hi YXI friends,

As we approach the September FOMC meeting, it’s time to map out our base case expectation for how markets could develop in the coming weeks.

We begin with with a review of Friday’s Nonfarm Payrolls, which has fuelled the ongoing debate of a 25bp versus 50bp rate cut.

We discuss the current market regime and assess whether equities are just experiencing a temporary setback.

Finally, don’t miss our detailed analysis on the price charts and trade setups for TLT, SPY, Mag-7 stocks, Bitcoin, Gold, and Silver.

Let’s dive in!

DISCLAIMER: This newsletter is strictly educational. Any information or analysis in this note is not an offer to sell or the solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice and nor should it be relied upon to make investment decisions. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note's date of publication and are subject to change without notice.

1. Nonfarm Payrolls Leaves the “25 vs 50” Debate Unsettled

In August, 142k new jobs were added according to the Establishment (i.e Employer) data. Household surveys indicated an Unemployment Rate of 4.2% in August, a welcoming drop from July’s 4.3%.

The Employment number undershot the forecast of 164k, which in itself a smaller issue than the downward revisions of 86k in July and June numbers. Remember just a month ago, the July numbers sent market into a tantrum over recessionary issues. Now things were actually even worse.

Hourly Earnings rose 0.4% MoM, or 3.8% YoY, an acceleration from July. As you can see from the chart above, while the YoY rate trended down in the past year, the 3-month annualised rate (i.e. past 3 months’ data extrapolated for a year) shows a rising trend since April.

Hourly Earnings can heavily influence Core CPI by putting an upward pressure on services inflation, if businesses pass on their rising labour costs into higher prices.

The market initially didn’t know what to make of Friday’s Nonfarm Payrolls data. There is a mix of everything - worse jobs added than expected, but better unemployment rate and higher hourly earnings.

In the end, the market decided to focus on the below-expectation-headline numbers and revisions. This led to risk-off moves, where yields and equities fell together.

To me the report is not sufficient for a 50bp cut. The psychology of the Fed right now is “if in doubt, cut small”.

People tend forget that the Nonfarm Payroll numbers can be negative, i.e. net job losses. We are clearly nowhere near that territory yet.

A 25bp cut would be entirely consistent with the Fed’s cautious approach to loosening financial conditions this year. The voting members have the comfort of a better unemployment rate and stronger wage growth to fall back on.

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