Japan

✅Bank of Japan official played down the chances of a near-term rate hike while markets are in turmoil.

✅”As we are seeing sharp volatility in domestic and overseas financial markets, it’s necessary to maintain current levels of monetary easing for the time being,” – Uchida

🤷‍♂️This announcement is designed by the BoJ to reduce market volatility and facilitate stability in markets, by limiting JPY accelerating to the upside.

🤷‍♂️This also suggests that current market conditions are extremely sensitive and institutional investors are ready to sell the strength.

Fed

✅This week’s market volatility was exacerbated by a softer-than-expected U.S. job report on Friday, and disappointing earnings from major tech firms, sparking a global sell-off in riskier assets as investors feared the U.S. economy was heading for a recession.

✅Traders have also adjusted their expectations from the Federal Reserve this year following the job report last week, with nearly 105 basis points of easing anticipated by year-end.

Target Rate Probabilities

✅64.5% probability of a 50bps rate cut in Sept.

Vs

✅Yesterday compared with an 81.5%

🤷‍♂️The Fed may not come to rescue to the markets as BoJ just did and as many are expecting, this may lead to a greater volatility in the markets going forward. Specially with US elections around the corner.

Target Rate Probabilities

✅81.5% probability of a 50bps rate cut in Sept.

✅50.8% probability of a 25bps rate cut in Nov.

✅42.3% probability of 50bps rate cut in Nov.

✅39.5% probability of 25bps rate cut in Dec.

✅43.9% probability of 50bps rate cut in Dec.

🤷‍♂️The markets are spooked. Markets are pricing in more and more rate cuts. But will the Fed deliver?

🤷‍♂️Some are even calling for an emergency rate cut in the upcoming weeks if this continues. I don’t think this will happen. Unless something fundamentally breaks.

ISM

✅ISM services for July 51.4 vs 51.0 expected

✅ISM data beat across the board

Recession Indicators

🤷‍♂️All the classic recession signals are lining up.
1)Unemployment rate +0.8% within 12 months. (Sham Rule also triggered).
2)Yield Curve is normalizing after the longest period of inversion.
3)Persistent weakness in manufacturing/output*, employment, housing, and the consumer.

🤷‍♂️Services did come in stronger this month in comparison to last.

Summary

🤷‍♂️ISM beat without contraction in any category this in my opinion will hinder the Fed’s ability to cut rates. An ISM beat strengthens GDP or at least props it higher. Without a weakness in growth and or employment the fed is unlikely to cut rates.

🤷‍♂️If we see an acceleration to the downside of the market due to current geopolitical tensions exacerbating into a full scale war along side of the Japan “Carry Trade” we may see the Fed step in. This will only happen if circuit breakers start getting triggered.

🤷‍♂️However, if we don’t see an escalation or see a limited response. We may a bounce over the next few days.

🤷‍♂️The longer term trend however is still bearish in my opinion, as recession risks continue to rise.