Wall Street Sharks Smell the Blood of Rate Cuts on the Horizon

On the heels of a dovish Fed meeting and weaker than expected jobs report Wall Street Sharks smell a rate cut coming. They aren't wrong. Here's why.

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The timing couldn't have been better. On the heels of two months of back to back losses. Bearish sentiment and low equity exposure. Stock indices put in one of the best weeks since last year. Like sharks in a blood driven eating frenzy, traders scooped up whatever stocks they could get their hands on. Shorts were forced to cover, and some of the best performers were companies with high debt and challenged balance sheets. Regional banks with large unrealized losses and held the maturity portfolios put in one of their best weeks since the March collapse of Silicon Valley and Signature banks. Financial institutions with large exposure to troubled commercial real estate and rates rocked. Maybe the most interesting observation was that almost every asset class pushed higher. Large caps. Growth value. Small caps, bonds, and most commodities put in a strong week. The notable loser was oil, with WTI and Brant down 5.90 6.2% respectively. After spending a couple of weeks living below the 200 day moving average. It took the S&P 500 just five trading days to take out the 200 the 50 day, and now sits just 1% from the 100 day moving average. Okay, that's the recap. But what does it all mean? Let's work backwards and figure it out. Welcome to The Money Runner. I'm David Nelson. Friday's jobs report fit the narrative for the week that somehow the Fed is going to engineer a soft landing. I think the numbers say something completely different. It confirmed with the man in the street has been feeling for months that not only was 150,000 print softer than expected, you have more than 100,000 in revisions to the downside. And the unemployment rate is now a full one half percentage point above the cycle, low set back in April. Even the workweek slipped. The reaction in the bond market was what you would expect and forced more buying in all asset classes. While Wednesday's Fed decision decision and the dovish commentary that followed was the trigger, it was Thursday that I thought was the most important day of the week. Fed decision days are usually ripe with volatility and force a lot of buying or selling, especially into the close of trading. However, very often the following day can see a reversal. So this week, not only did it follow through, but it was also one of the bigger one day gains of the year. While fed action and a soft jobs report take most of the credit for this week's rally. It was an announcement from the U.S. Treasury that really got the party started. How much debt Treasury is going to issue in a given quarter is usually something only bond wonks and financial nerds care about. Not anymore. When you're running a $33 trillion balance sheet, running a deficit on a path to 2 trillion. Everyone cares. Treasury announced that they were going to issue less debt than expected in the fourth quarter. If you want to get a better price on the debt you are about to sell, reduce the supply works every time. Bottom line traders are like sharks and attack quickly once they smell blood. Traders took the dovish commentary from the Fed and combined it with the softer than expected employment numbers and did the math. The Fed is going to cut rates. We can debate the timing, but what isn't up for debate is the cut and Wall Street Sharks smell it coming. Take a look at interest rate probability tables before and after last week. First, the economy is starting to slow. Takes a long time for Fed policy to fully wash through the system. But the rolling downturn is finally hitting employment. Washington plans to issue less debt in the fourth quarter, but how long can they keep that up? We've gone deep into two wars with no end in sight and gearing up for a potential third sometime in the next couple of years. Do the math. The above means rising deficits and higher debt loads. Treasury will need all the help it can get to hold down refunding costs. The Fed can only help so much for when push comes to shove. They will be the buyer of last resort. In the short run, the Fed will do all it can to wipe out expectations of a cut. But we can all see what's coming. There is no way that Treasury can keep issuing debt if yields keep pushing higher. While the Fed's playground is the short end of the yield curve, predominantly driven by the Fed funds rate. The long end does respond to both Fed policy and rhetoric. Last week was a perfect example. Ten year rates fell a full 30 basis points following the Fed decision and press conference Wednesday and then fell further following Friday's weaker than expected jobs numbers. The relief rally has likely run its course. Could we drift higher into the close of the year? Sure we could. Earnings season is for the most part behind us, and it is seasonally a good time to be long stocks. But make no mistake, we have serious challenges in front of us. But the Fed can't fix. The United States is running a government. Americans can't afford. The good news is that as investors, we have choices. For the first time in more than a decade, we can make money in both stocks and bonds. Conservative investors forced out of safety into risk assets have short term fixed income opportunities, and equity investors have a major new secular growth driver in artificial intelligence. Almost every company is adopting the technology and finding ways to enhance the top and bottom line. Remember, it is not just the tool makers in technology driving the revolution. Their customers may ultimately have the most to gain. That's it. I'm out of time. If you got something out of this week's podcast, help us . Hi Subscribe. Thanks for joining. I'm David Nelson.