Equities struggled Thursday as investors dumped risk assets ahead of the August payroll report. The Nasdaq ended the day flat, while the S&P 500 fell 0.4% and the Dow dropped 0.6%. New labor market data released Thursday sent mixed signals about the health of the economy. Private payrolls showed the weakest growth since 2021, raising more fears of a slowing labor market.
sources: CNBC, WSJ, Bloomberg
Closing snapshot
source: MarketWatch
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Hackers
North Korean hackers are targeting cryptocurrency companies and their employees with social engineering attacks and malware. These hackers have been conducting research on people working with cryptocurrency exchanges and other companies. The FBI warned that hackers often impersonate individuals with fluent English and sometimes pose as prominent people associated with certain technologies.
In other North Korean cyber news, the Wall Street Journal reported that North Korean spies are entering U.S. companies through IT jobs. The spies join the payrolls as remote workers for American companies, filling hundreds, if not thousands of low-level tech and other jobs. According to U.S. officials, they are using stolen identities of foreigners. In one instance, a cybersecurity company called KnowBe4 hired an applicant named Kyle who gave a Washington state address, though he actually lived in North Korea. Spoiler alert, his name wasn’t really Kyle.
“Kyle” set off the company’s internal security alarms when he attempted to deploy malware on his first day (rookie move). The FBI traced Kyle to a Washington state residence where they found a middleman who was assisting in the operation.
sources: Bloomberg, WSJ
“Difficulties strengthen the mind as labor does the body.” – Seneca
Interest Rates
Rate option traders are increasing their bets that the Fed will start its easing cycle with a 50 basis point cut. Though fed funds futures still favor the odds of a 25 basis point reduction, the probability of a larger initial cut is inching up. With 100 basis points of cuts priced in for the remainder of 2024, if the market is right (it’s not always), there would have to be one cut of 50 basis points.
Much of the focus on the Fed’s seemingly imminent rate campaign has been on the timing and size of the cuts this year. There’s been less discussion around the level at which the Fed will stop. Oaktree Capital’s Howard marks makes the case for why the Fed won’t reduce rate below 3% here.
As we mentioned in yesterday’s letter, after 26 months of inversion, the 2yr-10yr yield curve is finally flat. While some are heralding this normalization as the disappearance of a recession harbinger. We’re not out of the woods yet.
As discussed by Bloomberg’s John Authers, another yield curve is still deeply inverted. The spread of fed funds over 2 years hasn’t been this twisted since before the Great Financial Crisis, which isn’t very comforting. At best, it is a signal that the market expects a rapid series of rate cuts.
Though the fed funds is pricing in a low probability of cuts continuing into January:
sources: Bloomberg, WSJ
Jobs
With inflation subdued, economists and the Fed have pivoted towards the labor market. Five year inflation expectations as implied by TIPS breakevens are back to post 2020 lows.
Wednesday’s JOLTS number showed that job vacancies dropped to their lowest levels since 2020. This, combined with increased number in the workforce, though unemployed, has driven the job vacancy rate to just 1.1 vacancy for every person looking for employment.
The “rate of quitting” remained steady at 0.59 after having spent most of 2022 at double that level. The rate is an indicator of how confident employees feel at quitting their jobs and finding another one.
sources: Bloomberg, WSJ
Global slowdown pressure commodities
Sometime a picture (or chart) really is worth a thousand words. We’ve been beating the drum on how, given the level and seriousness of geopolitical tension around the globe, oil prices would normally be much higher. The charts above are a good illustration of how the slowdown in global economic growth is impacting oil and industrial metals. Opec + member are said to be debating delaying a scheduled productivity increase that was scheduled for October due to already weak prices.
sources: Bloomberg, WSJ, CME Group
In other news:
The Biden administration accused Russian President Vladimir Putin of conducting a campaign to influence the upcoming U.S. election and erode support for Ukraine. The Russian campaign allegedly targets American voters with political propaganda and disinformation.
Biden’s administration also moved to block the sale of U.S. Steel to its Japanese competitor Nippon Steel. U.S. Steel’s CEO warned that should the deal collapse, the company would close mills and likely move its headquarters out of Pittsburgh. U.S. Steel defended the deal stating that Nippon’s pledge to invest nearly $3 billion in the company’s older mills is critical to keeping them competitive while maintaining jobs.
Dollar Tree shares had their worst day in decades as the discount store chain fell way short of Q2 revenue expectations. Its CEO attributed the disappointing results to having to navigate through one of the “most challenging macro environments we’ve ever seen.” Many retailers have pointed to sluggish demain in their most recent earnings reports.
sources: WSJ, CNBC, Bloomberg, IBD, MarketWatch
The stinger
Disclaimer
This letter is not offering investment, trading, or investment advice nor is based on any individual portfolio or business operation. We are are not a registered investment, stock nor commodity advisor. One should consult with their own registered advisor to discuss investment strategies that are appropriate for their business or personal goals, risk tolerance and financial situation. Information in this report and on any website is derived from a variety of source believed to be reliable however no representation is made that the information is accurate, complete or correct. These lessons, newsletter and site content is not intended nor shall not constitute or be construed as an offer or recommendation to “buy”, “sell”, “trade” or invest in any securities, commodities, futures, options or other asset referred to in said lessons, reports or newsletters. Rather, this research is intended to identify situations and circumstances that those in the trading community should be aware of to better help assess and improve their own risk management skills.
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