It is a holiday-shortened trading week, with markets closed in the US on Monday for the Labor Day holiday. It marks the unofficial end of summer, with kids returning to school and traders coming back from the Hamptons. Hopefully, it also signals the end of the summer malaise we’ve seen over the past few weeks.
Although the week is shortened, it will still be busy, with the ISM report on Tuesday, JOLTS on Wednesday, ADP and ISM Services on Thursday, and the BLS jobs report on Friday.
In many ways, the jobs report has become a complete joke and can’t be relied on. Last month’s revisions really turned the outlook for monetary policy on its head. However, remember that we saw a similar trend last year, which led the Fed to cut rates by 50 basis points at the September meeting — and then, just like that, the data started improving again.
That makes the jobs data not only highly volatile, but it also raises serious questions about the path of rate cuts. What happens if the August jobs report shows a 200,000 gain and July’s NFP print is revised higher to over 150,000? In that case, why should the Fed be cutting at all?
On the other hand, what if July is revised down to -50,000 and August comes in at just 10,000 jobs? Then the Fed would be well behind the curve. Until we see the August data, we’ll just have no idea.
The spread between the 3-month Treasury bill and the 3-month/1-year forward is just 53 bps, which suggests only two more rate cuts over the next 12 months, excluding September. The 3-month Treasury bill is currently trading at 4.15%, which already has a September cut priced in. For now, the market is signaling just three cuts in total between now and September 2026.
What’s interesting, though, is that Fed Funds futures over the next twelve months are pricing at 3.24%, which implies just over four rate cuts. When comparing the spread between the 3-month Treasury bill 1-year forward and Fed Funds futures, it’s clear that expectations for Fed easing have been consistently more aggressive on the futures side. This suggests the rate-cutting cycle may not be as steep as some parts of the market are expecting.
Perhaps this is directly related to the inconsistent labor market data reporting we’ve been receiving. I would argue that significant fluctuations in data points raise questions about the accuracy of the data and could lead to distortions across markets.
This will also be an extremely significant week for Treasury settlements, with $140 billion in bills and coupons settling on Tuesday and an additional $20 billion on Thursday.
This should further drain reserve balances held at the Fed, which have already fallen to around $3.2 trillion over the past couple of weeks as the Treasury General Account moves back toward $850 billion. Overall, reserves should be closer to $3 trillion by September 30.
While I hate talking about Bitcoin, it is a very good liquidity proxy, and so far it has been weakening right on schedule, falling by around 12%. If the view on reserve is correct, then Bitcoin should continue to decline as liquidity is drained from the system.
The same would hold true for the S&P 500 and the NASDAQ 100. We’ve seen divergent paths in the past, only for the two to come back in line at some point.
The difference this time is that there’s nothing left to push reserves higher. The reverse repo facility is drained, and QT is still running in the background. Reserves are likely to continue moving lower until the Fed stops QT and restarts asset purchases — which, as of now, is not on the horizon.
