Market Reactions Following Waller's Advocacy for "Front-Loading" Rate Cuts

Initial Market Response to Jobs Report

Following the release of the jobs report, risk assets experienced a strange reaction. Initially, there was a surge, but a sell-off began shortly after the cash open. Bitcoin was the first to be hit hard, followed by oil, which had been declining all morning. The USDJPY, which had briefly rebounded on the initial move higher, also reversed.

Some traders speculated that even though the market had received the anticipated 25bps rate cut, they decided to push for a 50bps rate cut. This led to a drop in the S&P, which, after reaching a session high of 5,530, fell straight down 100 points to 5,431. This seemed to be a familiar game of chicken with the Fed, where stocks dump unless the Fed agrees to more easing.

Waller's Remarks and Market Rebound

At 11am ET, S&P futures suddenly rebounded when Fed's Waller delivered remarks. He stated that the current data no longer required patience, but "action." He advocated for "front-loading" rate cuts if appropriate.

Waller made several other statements, including that he believes the time has come to begin reducing the policy rate at the upcoming meeting. He also stated that a series of reductions in the policy rate would likely be appropriate, but determining the pace of cuts would be challenging. He also expressed openness to the size and pace of cuts, depending on data. He stated that if future data showed significant deterioration in the labor market, the Fed could act quickly and forcefully.

Interpretation of Waller's Speech

While the initial reaction to Waller's speech was that he was endorsing a 50bps rate cut, Nick Timiraos of the WSJ suggested that Waller was actually leaning towards a 25bps cut to start, with the option to go faster "as appropriate" if "new data" showed more deterioration.

Timiraos also noted that Waller praised the Fed for not overreacting to the banking crisis, the lower inflation prints of 2H 23, and the higher prints of Q1 24. He quoted Waller as saying, "Based on the evidence I see, I do not believe the economy is in a recession or necessarily headed for one."

Market Reaction to Waller's Speech

The market's reaction to this sequence was as bizarre as its initial reaction to the jobs report. While stocks initially jumped, they quickly reversed all gains and have since fallen, not only to session lows, but rapidly approaching the lowest level since the early August freakout. The market appears to be in a state of confusion, trying to decide if it wants a 25bps cut, a 50bps cut, and whether it prefers a soft or a hard landing.

With the rise of negative dealer gamma, the selling algos are clearly in control this morning, with the dollar plunging, yields sliding to fresh session lows, and risk assets in the red.

Bottom Line

The market's reaction to the jobs report and Waller's speech was unpredictable, with stocks surging and then falling. The market appears to be in a state of uncertainty, trying to decide what it wants in terms of rate cuts and the type of landing it prefers. It's clear that the market is in a volatile state, with selling algos in control and risk assets in the red. What are your thoughts on these market reactions? Do you think the market will stabilize soon, or will the volatility continue? Share this article with your friends and let us know your thoughts. Don't forget to sign up for the Daily Briefing, which is delivered every day at 6pm.