Atlanta Federal Reserve President Raphael Bostic recently stated that the Federal Reserve’s dual mandate—price stability and full employment—is balanced for the first time since 2021. However, he warned that if the Fed waits until inflation fully returns to 2% before easing its restrictive policies, the labor market may face certain risks. Last night, U.S. stock markets ended lower. Although the decline was not as severe as on Tuesday, the underlying market risks are building.
Market Risks and Rising VIX Index
Last night, the U.S. stock market showed significant declines. While not as steep as Tuesday’s, risks remain elevated. The VIX index further rose to 21.32, remaining above the warning level of 20. Meanwhile, tech stocks saw further declines, with Nvidia falling 11% over two days. If Tuesday’s market sell-off was like a loud bang, Wednesday’s continued sell-off was more of a whimper. This week’s market turbulence has clearly caught the Fed’s attention.
Bostic’s Market Soothing Efforts
Amid the significant market fluctuations, Atlanta Fed President Raphael Bostic appeared as the Fed’s “firefighter” to calm the situation. In the news, he stated that while the labor market has softened, it remains robust, and the Fed does not intend to maintain high interest rates for an extended period. Bostic did not provide specific numbers regarding a rate cut of 25 or 50 basis points, as any specific figures on rate cuts would be viewed negatively by the market at this time.
Rising Expectations for Rate Cuts
Expectations for a 50-basis-point rate cut by the Fed have increased, with the probability briefly rising to 50% before falling back to 44%. This adjustment in expectations might seem like a small step, but it is a significant one. If tonight’s economic data further deteriorates, this probability could exceed 50%. Currently, U.S. interest rate futures suggest the Fed may cut rates by 225 basis points by the end of 2025. Historically, such a level of policy easing aligns with periods of economic recession. Interest rate option traders have also increased their bets that the Fed will begin its rate cut cycle with a 50-basis-point cut this month. Options tied to the Secured Overnight Financing Rate (SOFR) have seen a significant increase in open interest for multiple call options expiring on September 13, five days before the Fed’s post-meeting announcement.
Market Reactions and Recession Concerns
More notable than the fluctuations in the probability of a 50-basis-point rate cut by the Fed is the market’s reaction. Last night, both U.S. stock markets and the dollar fell in tandem. As we warned earlier this week, even as expectations for a substantial rate cut rise, it remains bad news for the market due to concerns over a potential recession.
Impact of Key Economic Data
One of the main reasons for last night’s market volatility was economic data showing that U.S. job openings in July fell to their lowest level since early 2021, below all economists’ expectations. Data that falls short of or exceeds economists’ forecasts usually triggers significant market reactions. Last night’s data clearly indicated that the market is currently in a “bad news is bad news” phase. Three important economic data points are scheduled for release tonight, and analysts hope that the U.S. August ISM Non-Manufacturing PMI, due at 10:00 PM Tokyo time, will exceed expectations. After the last global stock market crash, the market’s rebound was significantly aided by this data. Global traders are now on high alert.
Performance of Gold Strategy
Despite last night’s market volatility, our recommended gold strategy still closed profitably (suggested short between $2,496 and $2,501, target at $2,473). The highest price of gold that day was $2,496, and the lowest was $2,471, enabling our strategy to be successfully executed. As market volatility increases, traders should remain vigilant and continue to monitor future economic data and Fed actions.