As we discussed in my last note, with the government now reopened, markets are back to trading economic data. And the risks are skewed toward negative surprises, given that the White House has said it expects the shutdown to shave 100 to 150 basis points from GDP.
We’ll get the September jobs report on Thursday morning. It will reflect conditions from two months ago, but should show a continuation of the four-month trend of very weak job growth.
On that note, we heard from the Fed’s Chris Waller today on his view of labor market conditions. Remember, Waller is one of three on the list to become the next Fed Chair. He gave a prepared speech today titled “The Case for Continuing Rate Cuts.”
Waller sees “underlying” inflation (excluding estimated one-off tariff effects) as near the Fed’s 2% target. That means the Fed funds rate is 75 to 100 basis points too restrictive, given where they see the neutral rate now (3%, from the most recent Summary of Economic Projections).
With that, he says he’s worried that “restrictive monetary policy is weighing on the economy.”
He sees a slower economy in the second half, even before accounting for the government shutdown. And he thinks the labor market has swung from a supply problem to a demand problem (i.e. weaker demand for labor).
So Waller makes the case for another quarter-point cut in December.
Meanwhile, as we discussed last week, the interest-rate market has been pricing out the probability of a December cut.
That weighs on stocks, and is providing fuel for the setup we flagged in late October for a technical correction.
Here’s the latest chart on the S&P …
Remember, as we’ve discussed over the past few weeks, the October 29 peak in the S&P forward P/E was 23. The last time we saw that valuation was September 2, 2020, which was followed by a 10% price correction.
This time around, the technicals are also lined up for a price correction.
From the chart above, we have a bearish technical reversal signal (circled), and a breakdown of the trend from the tariff-shock lows. Add to this: the VIX (the cost of downside stock-market insurance) is back above 20 — a level that tends to come with lower stock prices.
A 10% correction in the S&P (from October highs) would take us back to the August levels of ~6,250.
Another chart to watch is Bitcoin, particularly given that it now sits on corporate balance sheets and is being used as collateral …
As the overlay above shows, Bitcoin and S&P futures have traded in a tight relationship in this cycle. And Bitcoin has already had a sharp and deep drawdown.
It matters for stocks because Bitcoin is no longer just retail speculation, corporates and financial firms hold it on balance sheet, and it is increasingly pledged against credit lines, structured products and derivatives.
So, when the price falls this quickly, lenders call for more collateral, the easiest thing to sell to raise cash is liquid equities.