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MARKETS

The S&P 500 took another hit Thursday as a series of economic body blows stoked fresh recessionary worries, with jittery investors pulling back on risk and shelving bullish bets. Mixed employment data ahead of Friday’s August nonfarm payrolls report has only fueled concerns that we may be teetering on the edge of another growth scare. Now, it's all down to the jobs report to steer the economic ship, but there's an unsettling sense that we’re heading into a "Freaky Friday" scenario if the data disappoints.

Wall Street is already hedged for a big day, with one-day options pricing in a 1% move in either direction. But here's where things get interesting: with so much optimism baked into the idea of Fed rate cuts, there’s a considerable risk of market irony. After all, investors have been laser-focused on rate cuts for nearly a year—ever since Waller’s infamous pivot—so when the Fed finally pulls the trigger, the market might not react as bullishly as one hopes. It’s setting up a make-or-break moment where expectations and reality could clash in unpredictable ways.

One thing is becoming increasingly evident: the more the market leans into the idea of a 50 basis point cut, the shakier equities get. This week’s relentless market slide is a reflection of mounting fears that a 50 bp cut isn’t a soft cushion but rather a red flag signalling turbulent economic waters ahead. And now, all eyes are on the real litmus test: the August jobs report, set to drop tomorrow. A weak report that pushes the unemployment rate higher will almost certainly ignite the simmering growth fears, potentially setting the stage for another painful correction—eerily reminiscent of last month's chaos.

If that happens, rate cuts may no longer be seen as protective "insurance" but instead as a desperate attempt to sidestep a hard landing, further amplifying the market's jitter.

The pressure is mounting, particularly after last week’s unexpectedly sharp revision to payroll data for the 12 months ending in March. This has made the upcoming report all the more critical. The stakes couldn’t be higher, and all eyes are on whether the jobs data will right the ship or send markets into another tailspin.

THE GLARING DISCONNECT

The glaring disconnect between FX, bonds, and equities is like watching three movies simultaneously. The FX and Bond market seems to be bracing for a sub-100k jobs number, while equities still live in the soft landing fantasy. Something’s got to snap. Either rates and the dollar catch a lift on a consensus jobs print, or stocks take a nosedive into the plunge pool on a payroll miss, finally syncing back up with the bond, FX, and commodity markets. It's the calm before the storm, and the tension’s palpable.

The magic number to watch here is 150k, roughly the job replacement rate. Fall below that, and we’re likely heading straight into "growth recession" territory. No, it’s not a full-blown economic meltdown, but it’s a slowdown significant enough to raise some eyebrows. And let’s not kid ourselves—the weak Beige Book from earlier this week suggests the clouds are darker than even a sub-100k payroll print might let on.

In short, this isn't your doomsday scenario, but the kind of grim outlook that’s got FX and bond markets already biting their nails.

If payrolls land right on the mark, wouldn’t that imply a bump in US rates and the dollar? However, anyone can guess how the mercurial stock market reacts. That said, a series of 25 basis point cuts from here might still be the sweet spot for equity multiples—if it’s accompanied by stable growth.

The real challenge here is that with the S&P trading at 21x earnings and the consensus already pricing in 10% earnings growth this year and 15% next year, the market has pretty much baked in a soft landing with stellar earnings growth. Longer-term rates have already been drifting lower since April in anticipation of rate cuts, but economic surprises have disappointed, and interest rate-sensitive cyclical stocks have struggled. This begs the question: will rate cuts even change the game fundamentally? Or are we looking at a market running on fumes, hoping for miracles that might not materialize?

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