The Breakdown - How the Jobs Report Changes Rate Cut Calculus

Episode Date: October 8, 2024

On Friday, the nonfarm payrolls report came in much hotter than expected. On today's episode, NLW looks at the market reaction and specifically, what it means for the likely path of Federal Reserve interest rate cuts. Unlocking Bitcoin DeFi with ExSat The exSat Network aims to unlock and scale the Bitcoin ecosystem without compromising Bitcoins Ideology. The network has partnered with the largest mining pools in the world, major custodians and exchanges, Cefu, Cubolt, Matrixport, Copper, OKX and aims to have over $200M TVL at mainnet launch on the 23rd of October.  Follow exSat’s Twitter to stay up to date @exsatnetwork or visit the testnet exsat.network Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Monday, October 7th, and today we are talking about the jobs report and what it means for October. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. Hello friends, happy Monday. September's job report came out on Friday and showed a renewed burst of strength for the labor market.

The figures beat estimates across the board. 254,000 non-farm payroll were added, almost 70% above the consensus estimate. Unemployment ticked down to 4.1% defying expectations it would continue to rise. Wage gains increased mildly, now running at 4% on an annualized basis. Figures from August and July were also. revised upwards with a 30% increase in payrolls from the original numbers. Kathy Jones, chief fixed income strategist at Charles Schwab said, it was wow across the board, much stronger than expected. The bottom line is that it was a very good report. You get upward revisions and it tells

you the job market continues to be healthy, and that means the economy is healthy. The jobs report has been heavily criticized over the past two years for a lack of accuracy and a string of major revisions. Chair Powell even stated at the last Fed meeting that the committee would be mentally adjusting the numbers down. While the accuracy, of headline numbers have been questionable, the reports have largely been accurate in identifying the trend. The issue was largely that the jobs report showed a mild softening in the labor market during last year, when the slowdown was actually much worse. This data seems to show the labor market bottomed out some time over the summer and is now strengthening. That would still be true

even with fairly pessimistic mental adjustments from the Fed. Digging a little further into the data, one of the biggest signs of a trend change is a recovery in restaurants and bars. The hospitality sector saw 69,000 new jobs added in September, after averaging just 14,000 per month over the past year. Under employment also fell to 7.7%, the first decline in almost a year. Now, to be clear, this data doesn't show a strong labor market, just one that is no longer weakening at a potentially alarming rate. Of course, what markets care about is what this data means for the likely path of Fed rate cuts. September's 50 basis point cut was premised on the idea that the Fed needed to act decisively to position themselves for further labor market deterioration.

Now it seems that follow-through is unnecessary and the Fed can take their time in bringing rates down. Bloomberg Economist, led by Anna Wong, wrote, We think the prospect of soft landing for the economy has brightened. It's probably premature to conclude that the Federal Reserve's 50 basis point rate cut has already stabilized the labor market. What's more likely is that the Fed's next move will be a 25 basis point cut in November. Markets are now pricing in a single cut as a near certainty for the November meeting. At the beginning of last week, there were still 35% odds of a double cut.

The base case is now a single cut in December as well, taking one cut off the table entirely for this year. Longer-term pricing now suggests the Fed will deliver fewer cuts over the coming year, ending the easing cycle with rates still above 3%. We're even starting to see suggestions that the Fed will need to backflip entirely. George Catrumbone had a fixed income at DWS America said, The Payne Trade was always higher front-end rates due to less rate cuts being priced in. What could happen is the Fed either delivers no more rate cuts or actually finds itself having to raise rates again.

Legendary investors Dan Drucken Miller commented, I hope the Fed is not trapped by forward guidance the way they were in 2021. GDP above trend, corporate profits strong, equities all-time high, credit very tight, gold-new high, where's the restriction? Basically, the data could always deteriorate, but for now, there's no justification for the aggressive rate cuts that many had penciled in. The stock market responded positively to the blowout jobs print, notching solid gains on Friday. The Kobayisi letter wrote, current market mentality. Jobs report above expectations, buy stocks. We've avoided a recession.

Jobs report below expectations, by stocks the Fed is going to cut rates. Jobs report in line with expectations by stocks the Fed is on track for a soft landing. The clear answer here is that risk appetite is incredibly strong. Markets are perceiving all news as good news for the first time in years. Markets seem to be buying the soft landing narrative as long as inflation can continue to fall towards 2%. That's a big if. The same reaction showed up in Bitcoin, which added 2% on Friday.

A flat weekend gave way to a risk-on breakout on Sunday night once the CME futures market opened. Bitcoin added another 2% reaching 63,700. and filling in the entirety of last week's slump. One potential view here is that uncertainties are being reigned in. The Fed's rate path is much more narrow, with fears of a labor market collapse greatly reduced. Liquidity is still expected to rise, but it now seems it will rise in an environment of solid growth in a stable economy.

Even geopolitical risks seem to be calming. Trader Jonah Van Berg noted a string of Sunday headlines suggesting Israel was taking a beat to reconsider the strength of their retaliation against Iran. Commenting, Crypto is already telling you that Monday is going to be risk on. Indeed, the Sunday night price move reignited hopes for a strong October after sentiment bottomed out last week. On Friday, social media analytics firm Santiment wrote, mentions of October have declined significantly, painting a picture that traders have become

much more bearish on the idea of this month being an automatic money printer for crypto. The lack of optimism opens the door for at least a short-term bounce. The weak start to the strongest month of the year had some analysts digging a little deeper. Last year, the first half of October was extremely weak, with Bitcoin losing over 7%. A 33% up move followed with the month closing with a 28% gain. That move was triggered by fake news that the BlackRock ETF had been approved, but it didn't end up mattering whether the news was real. A bit of seasonal support and a vibe shift was enough to carry Bitcoin to an extremely

strong final quarter. Earlier last week, as sentiment was getting crushed, whale swoosh tweeted, October never really started on October 1st. Here's when the parabolic moves that drove the returns actually started. In 2023, it was October 15th. In 2021, it was October 5th. In 2020, it was October 11th, in 2017, October 11th. Don't cancel October yet. Believe in something.

And indeed, taking a glance around the timeline heading into this week, it's clear the October vibes are back. Beanie Maxi tweeted, October to lead right into Moonvember. Imagine not seeing the obvious signs. Shorts are screwed. Chris 333 added, Welcome to a new weekly candle, the October candle, the dream candle. You're not bullish enough. So, Zentiment is clearly swinging wildly following the price. But a relatively modest Sunday night candle was enough to get everyone believing in October again. You can take one look at meme coin price action over the weekend to see how the market feels

about risk at the moment. Basically, it's clear that no one wants to be bearish in October, and folks are looking for any excuse to get long. Beyond a short-term flip on social media, renewed bullish sentiment is also clear from on-chain indicators. Over the past week, there was a big shift in net positioning. According to crypto-quant contributor Amur Taha, long-term holders are, quote, likely taking profits or closing buying positions, while short-term holders are likely taking on more risk or increasing their buying positions. For every buyer, there's a seller, so this data doesn't really tell us much beyond the fact that there was a lot of dip buying over the past week. Longer-term holders tend to distribute near the tops,

but this seems to be a small unlock of supply rather than the massive distribution we're more used to seeing. Cryptoquant's CEO, Ki-Yung-Ju tweeted, If this Bitcoin bull cycle is done here, whales have just set a record for the least profit-taking across all cycles ever. of the breakdown is brought to you by XAT Network. As regular listeners know, one of the things that I think is really exciting right now is all of the new builder energy around Bitcoin, and XSat Network is a great example of that. Ex-Sat Network utilizes a combined consensus mechanism of POW and POS, enabling miners to earn revenue and stakers to earn Bitcoin yield. Their state data index mirrors Bitcoin UTXO data,

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and unlock Bitcoin Defi with X-Sat. Hello, friends, before we get back to the rest of the show, I want to implore you to join me at Permissionless. Permissionless is the conference for crypto-natives by crypto-natives, and the reason it's so important this year is that despite regulators' best attempts to push industry founders, devs, and executives out of the U.S., the United States remains the beating heart of crypto. Today, the tide is turning. Policymakers have pivoted from fighting crypto to embracing it.

Literally now, we are in a major political parties platform, which will lead ultimately to the creation of new financial products, new applications, and ultimately new adoption. Permissionless is the conference for those using and building on-chain products. It's home to the power users, the devs, and the builders, and perhaps more importantly, I will be there. The location is Salt Lake City, the dates are October 9th to the 11th, and tickets are just $499. If you want to get 10% off, use code breakdown 10. Go to the Blockworks website, blockworks.com.

there will be links to register for the conference, and again, you can use code Breakdown 10 to get 10% off. With the second half of the show, let's move over to some updated political news. Coinbase have renewed their request for an early appeal in their lawsuit against the SEC. Back in April, Coinbase asked for an appeal to be heard on the narrow question of whether the SEC has jurisdiction over the secondary sales of crypto tokens. The agency said the appeal should not be granted, stating there was, quote, no substantial ground for difference of opinion.

The original court is yet to rule either way on the request. In a new filing, Coinbase claims the appeal in the ripple case changes the situation. They argued that presenting both cases to the appeals court at a similar time would help give, quote, a full account of the legal and practical implications of the SEC's litigating position. Coinbase wrote, The SEC has conceded and now reconfirms by its appeal and ripple that the issues presented by Howie's application to secondary market digital asset transactions are of industry-wide

significance. Prompt and complete appellate review is urgently needed. Now, interlocutory appeals heard in the middle of an ongoing case are very rarely granted. That said, the application of the Howey Test to Secondary Sales is a particularly unclear legal theory that would benefit from a clear precedent set in an appellate court. The Coinbase lawsuit is being heard in the same circuit as the Ripple case, so it would be influenced by that decision anyway. All Coinbase is really saying, then, is that it's better for the appeals court to consider

everything together, given the ambiguity in the law. James Murphy at Matt a Lawman noted that the Coinbase appeal is already deviating from standard procedure, tweeting, another smart move from Coinbase here. It's astounding that Judge Fahlia never ruled on Coinbase's original motion for interlocutory appeal filed back in April. These motions are normally ruled on very quickly. The SEC's appeal and ripple just strengthen Coinbase's argument. Switching over to Europe, Coinbase have announced that they will delist non-compliance stable coins in the EU. Coinbase is one of the last major exchanges to announce this move as EU regulations begin to take effect. Non-compliance stable coins will be delisted from the

platform by the end of the year. The regulations require stablecoins to obtain. an e-money license from at least one EU member state and comply with strict limits on the assets used as reserves. Circle has managed to bring their stable coins into compliance, with part of their solution being to segregate a portion of USDC supply for the European market and alter their reserves to fit within the rules. Tether is another question. In June, CEO Paulo Arduino criticized the regulations. He claimed a requirement to hold 60% of reserves as European bank deposits was impractical for large stable coins and could actually make reserves more risky. He noted that bank deposits in Europe are only insured up to 100,000 euros. More recently, Tether claimed to have a

technology solution that would allow them to comply with the rules without adding to reserve risks. No details are available, but Tether said they would be revealed in due course. Still, the clock is ticking. Binance, Bitstamp, Cracken, and OKX have already delisted Tether in Europe on the assumption they won't manage to meet the regulations. The Coinbase announcement didn't name any stable coin in particular, however, it's clear that December could be the end of the line for Tether in Europe if they can't satisfy regulators in time. Meanwhile, Pallo has reminded to the U.S. government that the world's largest stable coin is tethered to the sustainability of the national debt. In a recent interview, he said, I think that tether is the best friend of the U.S.

government because we hold more U.S. Treasury securities than Germany, much more than any other competitor or any other financial institution in the world. We are happy to decentralize the ownership of the U.S. debt, making the U.S. much more resilient. According to Tether's reserve reports, they now hold around 98 billion in U.S. treasuries. This would place tether in 21st place among sovereign holders, but the story is a little more complicated. Considering global central banks have dramatically slowed down their purchase of U.S. debt, Tether now plays an outsized role as a purchaser of incremental new issuance. The interview conducted with Coin Telegraph was a retrospective on Tether's 10-year anniversary, which passed this weekend. The early days were marked by a lack of

transparency and trust. Crypto users were largely forced to buy Tether if they wanted to hold U.S. dollars on exchanges. Moving forward, Pollo highlighted two shifting trends. He noted the rise of Tether usage in the Global South, adding, there is no point for us to compete in the U.S. Europe. Our focus has to be where we are needed the most. He also pointed to growing collaboration with U.S. authorities and global law enforcement. Palo claimed that Tether now has a, quote, very good relationship with the U.S. government. He said, Tether is the only stable coin that onboarded the FBI and the United States Secret Service. He further noted that the company is now engaged with 180 law enforcement agencies across 45 countries. Naccarasi, the president of the

ETF store, suggested the friendship actually flows in the other direction, tweeting, U.S. Treasuries are Tether's best friend. Tether simply printing money by pocketing yield. Ripe for disruption. And so, friends, that is where we stand at the beginning of this week. I'll be keeping a close eye on how this sentiment shift continues. Is October on the menu? Does it just actually have a delayed start, as some have argued? That's what we'll be watching, but for now. Appreciate you listening as always. And until next time, be safe and take care of each other. Peace.