Traders Anticipate Fed Rate Cuts Amidst Weakening US Economy

Economic Data and Fed Policy

• 📊 Recent economic data, including the jobs report and manufacturing/services ESM, indicates a weakening US economy.
• 📉 The three-month average of jobs added (35,000, excluding COVID-19 impact) is considered very weak compared to historical periods.
• ⚠️ New orders in the services sector are at their lowest point in the current cycle and even pre-COVID.

Market Expectations for Rate Cuts

• 🎯 Bond traders are increasing bets on Federal Reserve rate cuts, with expectations for a 75 basis point reduction in 2025.
• 💡 There's a significant market expectation (around 90%) for at least one rate cut in September.
• 📈 Swaps now price in nearly 60 basis points of easing, up from about 30 basis points before the recent payrolls report.
• 📉 Treasury yields have reflected this shift, with the 10-year yield falling.

Bullish Momentum in Treasuries

• 🚀 Bullish momentum is building in the cash market, with traders increasing their long Treasury positions.
• 📈 JPMorgan client surveys show outright long wagers on Treasuries are at their highest levels since April.

Federal Reserve Officials' Stance

• 💬 Some Fed members, like San Francisco Fed President Mary Daly, suggest the time for rate cuts is approaching.
• ⚠️ Federal Reserve Governors Christopher Waller and Michelle Bowman voted against holding rates steady in July, preferring a quarter-point reduction.
• 🧐 Investors are watching for potential new Fed Governor appointments that might align more closely with calls for lower rates.

Big Tech Earnings and CapEx

• 💡 Big tech companies are highlighted for the quality and quantity of their earnings growth, which remains strong across various economic conditions.
• 🚀 Their CapEx guidance is up 22% year-to-date for the next 12-24 months, which is remarkable given economic uncertainty.