After the dust settled on various data last week, market expectations for the FOMC's next interest rate decision have not changed much. The interest rate is still expected to remain "unchanged" in September, and the possibility of another rate hike in November is only about 30%. In addition, although the US economic momentum remains strong, last week's employment data was clearly dovish, especially the JOLTS job vacancies on Tuesday that were significantly lower than expected and the weak non-farm payrolls data on Friday.
In the late stage of the Fed's rate hike cycle, the negative correlation between asset prices and growth pricing and economic surprises has become increasingly obvious. The market has responded positively to the mild slowdown in data. The traditional 60/40 portfolio performed strongly last week, closing up 1.6%. As long as the data is not weak enough to plunge the economy into a severe recession, the "bad news is good news" trading philosophy may continue in the short term. This line is indeed quite subtle, and the current market behavior may be a bit short-sighted for neutral market observers, but such market behavior is not uncommon in the late stages of economic cycles in history.
In addition, the market is becoming more and more confident that the Fed is really nearing the end of its rate hike cycle. Interest rate volatility has been moving in the opposite direction of stock market and foreign exchange volatility for most of this year, but has finally seen a significant decline in the past 3 months. Although bond yields have seen a strong bear steep trend in the past month, implied volatility has declined. Although price pressures continue, oil prices have rebounded, and quantitative tightening is still proceeding as planned, the bond market seems to be more optimistic that there will be no "taper panic" this time; in this mood, asset prices may continue to be supported, but a lot of changes may also happen in the winter, especially if oil prices continue to soar from current levels.
There is not much economic data released this week, and the market focus will be mainly on the Fed's speech. Before the September FOMC meeting, there is only one CPI data release, but it is unlikely to change the September decision, because several officials have confirmed that they do not need to wait for this data to make a decision. The Fed's speaker list this week also includes some rare names, such as Dallas Fed President Logan and Governor Bowman, while Collins, Harker, Goolsbee, Williams and Bostic are also scheduled to speak this week.
In crypto, prices are trading lower again, and with participation still poor and momentum lost, prices have a chance to break through the August lows. In addition to the weak price, Opensea just announced that the number of active users in August hit the lowest level since July 2021, with only 126,000, while the overall NFT trading volume of major platforms (OpenSea, Blur, LooksRare, X2Y2) fell to a 2-year low, totaling $407 million.
In TradFi news, the London Stock Exchange Group (LSEG) announced that they are planning to build a blockchain-based digital assets business, but confusingly, the head of capital markets said the new exchange will “definitely not be building anything around crypto assets… [but] the idea is to use digital technology to make processes smoother, cheaper, more transparent… and to regulate them”.
He further stated that the group’s mission is to become the first large global stock exchange to provide investors with a complete, blockchain-powered ecosystem covering the entire life cycle of financial assets. This business will become independent from London Stock Exchange. The legal entity of the exchange is expected to start operations in 2024; reading between the lines, it seems that their efforts will be focused on tokenization, which is the topic of greatest concern to TradFi institutions currently and in the short term.
