A Second Look at What's Next for Markets
By: Andrew Kelvin, Rich Kelly, James Rossiter, Gennadiy Goldberg, Mark McCormick, Daniel Ghali, Oscar Munoz, Jayati Bharadwaj, Chris Whelan, Izidor Flajsmann, Jan Nevruzi, Bart Melek, Pooja Kumra
Aug. 15, 2024 - 3 minutes![The Federal Reserve building in Washington D.C.](/tds/image/Insights-Article-ImageBlock-Second-Look-at-Markets.jpg)
Markets have retraced portions of early August's extreme moves as they continue to assess and reassess recent data points. As the dust settles, there have been numerous explanations for recent market volatility: The data did it; Carry trade unwinds were the culprit; Tech bubbles are bursting; Markets are fearful of geopolitical risks.
The truth is that when you line up a number of factors that it "could" have been, or simply lazy positions that needed to be adjusted as the facts had changed, it was a confluence of events which generally all pointed in the same direction for markets. But more importantly, we think markets have underestimated the positioning in systematic funds, which by end-July was already signalling significant asymmetries that led us to flag the risks of sizeable volatility in the coming days.
August Saw Sharp Rise in Market Volatility
With our estimates of CTA positioning now signaling selling exhaustion across equity indices and 'max long' positions in rates, the focus now shifts to risk parity portfolios and volatility control funds as the next potential source of forced selling activity, catalyzed by a deleveraging process. We caution that a reversal in fixed income markets could now activate broad-based deleveraging from such funds, amid concurrent declines in every other major asset class in a higher volatility environment. So, this remains a market, given the usual summer illiquidity and now nervous nature, that will likely see traders keen to pare back on risk into weekends, and in which usually more mundane economic surprises could drive outsized market moves.
The next couple of weeks provide some potential catalysts; A U.S. consumer check-up and CPI update followed by our first signals for August payrolls. That will provide the Fed and global central bankers a chance to massage market expectations at Jackson Hole.
None of this is meant to downplay the fact that some fundamentals are drifting. We are still seeing too little stimulus delivered in China, and that continues to raise concerns for us for global manufacturing activity through the end of the year, which means markets like copper and oil could be much better supplied than expected. The U.S. labor market and other data have been phenomenally resilient, but the shine appears to be wearing off and moving us closer to our early outlook for 2024, which expected significant Fed easing to be kicked off in the second half of this year.
On that note, we did change our Fed call following the disappointing U.S. payroll data on August 2, which saw the headline payroll print come in about 60,000 lower than expected, and the rise in the unemployment rate triggered the widely followed Sahm rule that's meant to predict recessions. We now look for an additional 25bps rate cut in November to go along with our prior forecast of easing in September and December. Furthermore, we are also now looking for the Fed to continue easing by 25bps at each meeting next year until it reaches 3% by November 2025. We forecast the upper end of the Fed funds target range to end 2024 at 4.75% and 2025 at 3.00%.
The main risk to our view is that Fed leadership finds itself needing to go back to a neutral stance sooner than we anticipated as both sides of the mandate are largely back to or within the reach of their steady state. We no longer view the bar for 50bps cuts as overly high for coming meetings.
Sahm Rule Suggests Recessions Risks are Increasing
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The views or opinions expressed herein represent the personal views of the writer and do not necessarily reflect the views of TD Securities or its affiliates.
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![Andrew Kelvin](/tds/image/Insights-Article-Headshot-Andrew-Kelvin.jpeg)
Andrew Kelvin
Head of Canadian and Global Rates Strategy, TD Securities
Andrew Kelvin
Head of Canadian and Global Rates Strategy, TD Securities
Andrew is the Head of Canadian and Global Rates Strategy. In this role, Andrew contributes to the group’s economic commentary and advice on G10 government debt and rates markets. Prior to joining TD Securities in 2011, Andrew spent four years working at the Bank of Canada in the International and Financial Markets Departments. With our Credit Desk Strategy team, Andrew and his team were first ranked #1 in Greenwich Canadian FI Research Quality in 2021.
![Portrait of Richard Kelly](/tds/image/Insights-Article-Headshot-Rich-Kelly.jpeg)
Richard Kelly
Head of Global Strategy, TD Securities
Richard Kelly
Head of Global Strategy, TD Securities
Richard oversees the Global Strategy team, providing investment and strategic advice on G10 FX, rates, commodities, and emerging markets, as well as top-down global macro analysis, assessing the common trends in major economies and implications for markets. Prior to joining TD Securities in 2010, he was the Senior International Economist for TD Economics. Before that, he worked at the International Monetary Fund in Washington, D.C., and several other economic development organizations.
![Portrait of James Rossiter](/tds/image/Insights-Article-Headshot-James-Rossiter.jpeg)
James Rossiter
Head of Global Macro Strategy, TD Securities
James Rossiter
Head of Global Macro Strategy, TD Securities
James provides research and analysis covering global macroeconomic trends with a focus on G10 central banks, economic data forecasting and geopolitical risks. James ties together short-term macro dynamics with market moves while maintaining cohesive long-term views across countries and asset classes. James joined TD Securities in 2015.
![Portrait of Gennadiy Goldberg](/tds/image/Insights-Article-Headshot-Gennadiy-Goldberg.jpeg)
Gennadiy Goldberg
Head of U.S. Rates Strategy, TD Securities
Gennadiy Goldberg
Head of U.S. Rates Strategy, TD Securities
Gennadiy is Head of U.S. Rates Strategy, providing market commentary on interest rates and the U.S. economy and focusing on Treasuries, swaps, TIPS, and supranational and agency debt. He also focuses on US fiscal dynamics, monetary policy functioning issues, and front-end markets. Gennadiy was ranked top five in the Federal Agency Debt Strategy category in the Institutional Investor’s All-America Fixed Income Research team surveys between 2017 and 2021.
![Portrait of Mark McCormick](/tds/image/Insights-Article-Headshot-Mark-McCormick.jpeg)
Mark McCormick
Global Head of FX and EM Strategy, TD Securities
Mark McCormick
Global Head of FX and EM Strategy, TD Securities
Mark covers the major FX markets and helped develop the analytical framework used for market analysis, forecasts and trade ideas across different asset classes. Before joining TD Securities in 2016, he worked as a Global Macro Strategist at Credit Agricole Corporate and Investment Bank in New York. He was responsible for covering G10 and Emerging Markets currencies in the Americas. Previous to that he was a G10 Currency Strategist at Brown Brothers Harriman.
![Portrait of Daniel Ghali](/tds/image/Insights-Article-Headshot-Daniel-Ghali.jpeg)
Daniel Ghali
Senior Commodity Strategist, TD Securities
Daniel Ghali
Senior Commodity Strategist, TD Securities
Daniel is a Commodity Strategist for TD Securities in the FICC Strategy group, based in Toronto. He provides research and market analysis of precious metals, base metals, and energy markets, used in producing trading strategies that are disseminated to the institutional trading desks in Toronto, New York, London and Singapore, along with the broader client base. He is well known for his Quantamental approach, which has allowed him to develop data-driven tools, bespoke insights and tactical trading strategies across global markets. Daniel has the conviction to recommend bold views when opportunities warrant and has built a track record of providing sobering insights. Daniel holds a Masters in Business Administration from the University of Toronto, and is also a CFA charterholder.
![Portrait of Oscar Muñoz](/tds/image/Insights-Article-Headshot-Oscar-Munoz.jpeg)
Oscar Muñoz
Chief U.S. Macro Strategist, TD Securities
Oscar Muñoz
Chief U.S. Macro Strategist, TD Securities
Oscar Muñoz is the Chief U.S. Macro Strategist at TD Securities, providing research and analysis on the U.S. economy and financial markets for both internal and external clients. He's consistently been one of the top-ranked forecasters for U.S. CPI in recent years in the Bloomberg polls.
![Portrait of Jayati Bharadwaj](/tds/image/Insights-Article-Headshot-Jayati-Bharadwaj.jpeg)
Jayati Bharadwaj
Global FX Strategist
Jayati Bharadwaj
Global FX Strategist
Jayati Bharadwaj is a Global FX Strategist based in New York. Prior to joining TD Securities, Jayati was an FX and quant strategist at Barclays for 4 years covering G10 and EM. Her work includes thematic research and quantitative strategy to analyze financial markets, develop and back test models and tools, and provide market color. She holds a Master's in Finance from MIT Sloan and a Bachelor's in Economics from St. Stephen's College, Delhi.
![Portrait of Chris Whelan](/tds/image/Insights-Article-Headshot-Chris-Whelan.jpeg)
Chris Whelan
Director and Senior Rates Strategist, TD Securities
Chris Whelan
Director and Senior Rates Strategist, TD Securities
Chris applies quantitative and fundamental frameworks when assessing domestic and cross-market opportunities in Canadian rates across both federal and provincial bonds and swaps. Chris joined TD Securities in 2019.
![Portrait of Jan Nevruzi](/tds/image/Insights-Article-Headshot-Jan-Nevruzi.jpeg)
Jan Nevruzi
U.S. Rates Strategist, TD Securities
Jan Nevruzi
U.S. Rates Strategist, TD Securities
Jan contributes to the team's US rates commentary and produces trade ideas, focusing on nominal and inflation-linked government debt, interest rate derivatives, and money markets. Prior to joining TD in 2024, Jan worked as a US Rates Strategist at NatWest Markets.
![Portrait of Bart Melek](/tds/image/Insights-Article-Headshot-Bart-Melek.jpeg)
Bart Melek
Global Head of Commodity Markets Strategy, TD Securities
Bart Melek
Global Head of Commodity Markets Strategy, TD Securities
Bart provides commentary on commodity and various other financial markets and how they relate to the sectoral and macroeconomic outlook. Bart is a sought after media source for many leading print publications and business television programs. His forecasts are also part of the global consensus. Bart joined TD Securities in 2011 and has over 20 years of experience analyzing global precious metals, base metals, energy, and financial markets, as well as North American and global economies.