On September 9, the U.S. stock market took a breather from last week's sell-off. As the Federal Reserve enters a silent period, the market expects that the release of multiple economic data this week will hopefully make the outcome of next week's meeting clearer. The Federal Reserve's monetary policy and economic uncertainty remain the main factors for the volatility of the U.S. stock market in the short term .
    As the rate cut approaches, the yields of medium- and long-term U.S. Treasury bonds have fallen sharply. The 2-year U.S. Treasury bond, which is closely related to interest rate expectations, hit a new low since September 2022, and the benchmark 10-year U.S. Treasury bond fell to 3.71%, a new low since June 2023. The employment data has re-exacerbated investors' concerns about the slowdown in the U.S. economy and expectations of aggressive rate cuts. The Job Openings and Labor Turnover Survey (JOLTS) released by the U.S. Department of Labor last week showed that job vacancies, a measure of labor demand, fell to 7.673 million, the lowest level since January 2021. In the crucial non-farm report, new jobs in August were also lower than expected, combined with the continuous downward revisions to previous data, indicating that the labor market is losing momentum. Although the job market has not collapsed as the outside world fears, it is still clearly weak. In the past three months, the average number of new non-farm jobs has been 116,000, a significant slowdown from the average rate of 207,000 in the first half of the year. The current "Sam Rule" indicator is 0.57, which is still above the threshold historically associated with economic recession. In addition to the cyclical sectors being constrained by economic headwinds, the cooling of risk appetite also put pressure on the higher-valuation technology sectors. The Nasdaq fell more than 5% this week, and the artificial intelligence industry represented by Nvidia came under tremendous selling pressure.

The annualized quarterly growth rate of the U.S. domestic market (GDP) in the third quarter is expected to be 2.5%, which is slower than the 3.0% growth in the second quarter. The U.S. economy is cooling, and the manufacturing industry is still in recession. There is little sign that the situation will change soon, but it depends on the extent to which interest rate cuts will help bring more economic activity. From a macro perspective, whether there will be a soft landing depends on the subsequent actions of the Federal Reserve. Although it cannot be said that a recession is imminent now, the risk of policy mistakes cannot be ignored.

On the other hand, judging from market pricing, a 25 basis point rate cut has been fully digested, so the positive impact of a regular rate cut may become a catalyst for funds to be locked in. If a 50 basis point cut is chosen, it means that the economic situation has deteriorated and selling will be inevitable. Therefore, no matter how the Fed decides, the market is still driven more by the certainty of the economic outlook. A new round of selling last week once again touched the nerves of investors, and the latest judgments of Wall Street institutions were also divided. It is also worth noting that most global central banks have only cut interest rates by 25 basis points in the past few months, indicating that there does not seem to be widespread panic in the current global economic situation. The fact that other institutions such as the European Central Bank have only acted by 25 basis points shows that they do not currently believe that this is a situation that requires rapid adjustment. Even if the Fed only cuts interest rates by 25 basis points in its first rate cut, it will still cut interest rates significantly afterwards.

According to Dow Jones Market Data, the Fed has gone through five cycles of rate cuts since the early 1990s. On average, the S&P 500 rose 2.5% three months after the first rate cut. But this masks the sharp reaction to recessions that followed rate cuts in 2001 and 2007, when the index saw double-digit declines a year after both rate cuts. In particular, the spread between the 2-year Treasury yield and the federal funds rate has reached about 190 basis points, matching the widest level reached in the past 40 years. This pricing suggests that the bond market believes that the Fed is behind the curve. Volatility will continue to rise in the short term, and the fair value price-to-earnings ratio of the S&P 500 is 19 times, giving the corresponding range for the index between 5,000 and 5,400 points.