The Friday employment market report from the United States has caused a lot of panic. There is growing speculation that the Federal Reserve missed the start of the interest rate cut cycle and will now have to make up for lost time. According to market valuation, a September rate cut is already certain, with discussions now revolving around the extent of the reduction. Some are advocating for a 50-basis-point downward move. Asian indices are losing significantly, with Japan’s Nikkei dropping close to 12.5%. A 3-day depreciation (-21%) marks the biggest fall in several decades. The Japanese yen is getting stronger amid falling yields of government bonds (American, Japanese). The volatility index has risen to its highest level since 2020. There is a global risk aversion, aggravated by tensions in the Middle East.
The publication of the Friday NFP report created a lot of confusion. Expectations regarding U.S. interest rate cuts have primarily shifted. The discussion about September is no longer about whether monetary easing will begin, but about the scale of the Fed’s actions. Practically, the market is now leaning toward two 50 basis point cuts in September and November. Large financial institutions are changing their forecasts. There was even talk of an emergency cut before the September meeting. This week seems quite uneventful from a macro perspective. Today we will learn more from the ISM report for U.S. services. The market will have time to coolly assess the current situation.
Individual Fed representatives are trying to cool the negative sentiment. Austan Goolsbee from the Chicago branch emphasized that the bank will not overreact to the latest NFP report. He tried to reassure investors by pointing out that this is just a single publication and the Fed will receive many other data before its next meeting, which will clarify the situation. Thomas Barkin from Richmond Fed stated that as far as the job market is concerned, “we’re getting back to normal”. It would appear that the Federal Reserve’s goal is to temper moods and reduce market volatility. So far, this has not been successful.
The situation in the US job market has recently worsened, and that is beyond doubt. But the numbers do not indicate a collapse, but rather a more significant slowdown, which the Fed actually expected. The market sought an excuse for the sell-off and found one. In my opinion, the reaction may be exaggerated. Not long ago, bad data were good for the stock market, with investors interpreting such a situation as a sign that the Fed would simply start lowering interest rates sooner. The interpretation changed after the last FOMC meeting. It seems that the cost of money reduction has been fully priced, and the market started to be more afraid of economic growth than inflation, which has recently surprised positively with lower values. Now poor macro data are simply perceived as something negative.
The nervousness is illustrated by the VIX index’s surge to around 40 points – the highest level since 2020. This index shows the implied volatility on options based on SP500. Higher values indicate that the market is not doing well. The Japanese yen has benefited from recent events. The fall in USD/JPY is particularly dynamic. Of course, it must be taken into account that the value “drifted” very high over the past months, leaving room for correction. The Japanese currency is gaining for several reasons. Risk aversion pushes capital into the yen, traditionally seen as a “safe haven”. And there is also the strengthening of global “carry trade” transactions. Add to this the Bank of Japan’s decision: a second rate hike and announcement of further ones.
Despite the increase in risk aversion, the Polish złoty remains relatively strong. The PLN is strong against USD as well as GBP. It is losing slightly to EUR. Commodity currencies (AUD, NZD) are defensive. We observe increased volatility on the main currency pair. Within two days (today and Friday) the rate has fully reduced the drops that have been going on since mid-July. The rate left the large triangle formation (which has been forming for a year) and thus theoretically opened the way to higher levels, at least to 1.1130.
Łukasz Zembik, Oanda TMS Brokers.
Source: https://ceo.com.pl/czy-ten-strach-jest-uzasadniony-98749
