Bitcoin, Gold, Stocks Rally Hard After Fed Slashes Rates 0.5%

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Cliff-Notes:

• The Fed's 50 basis point rate cut, driven by concerns over a cooling labor market and slowing inflation, led to bullish market reactions, particularly in small/mid-cap stocks, gold, and bitcoin.
• Despite the Fed's aggressive rate cut, the market perceives a controlled normalization in the labor market, with job openings still historically elevated and jobless claims trending downward.
• Bitcoin's recent rally, driven by positive market sentiment and approaching key technical levels, suggests potential for significant gains, especially with historically strong performance in October.

The Fed slashed interest rates on Wednesday—cutting by 50 basis points (0.5%) to an upper limit of 5.00% for the Federal Funds rate.

This was a larger rate cut than I expected in my last report, but the market reacted bullishly to the more aggressive cut rather than bearishly.

The FOMC statement was changed to include recognition that job gains have slowed and confidence that price inflation is moving sustainably toward 2%. This move to slash rates by 50 basis points was made in light of those two realities.

Here is the Fed's Summary of Economic Projections from this Wednesday's FOMC meeting, where they lay out how they believe the next few years will unravel.

For the end of the year 2024, the FOMC revised real GDP growth down slightly from 2.1% to 2%, revised the unemployment rate substantially higher from 4.0% to 4.4%, revised PCE inflation down from 2.6% to 2.3%, and revised the Federal Funds rate down from 5.1% to 4.4%—all compared to its June projections.

TLDR; economic growth by year-end is projected to be somewhat lower than expected in June thanks to a swift cooling in the labor market, driving the projected unemployment rate up, price inflation down, and pushing the Fed to price in more rate cuts this year than previously projected:

The key word here is growth. Growth is still here, meaning the economy is still expanding—the economy is not contracting, therefore the economy is not in recession. The Fed's rate cuts aim to get out ahead of further cooling, and prevent the deceleration in growth from flipping into an outright economic recession.

Fed addressed major weakness in the labor market as a reason for the aggressive cut. The market doesn't feel that way, at least not yet.*

• *when the Fed cut by 50 bps to kick off the 2007 rate-cutting cycle, markets rallied hard for 3 weeks before dumping as recessionary data picked up.

The market doesn't see the same scary, imminent crisis-level weakness that the Fed does—and, frankly, it makes sense. It sees a controlled normalization in the labor market.

Hiring is slowing down—US job openings are at their lowest level since January 2021, however, they are still elevated by historical standards. Additionally, layoffs as measured by unemployment claims have come in as-expected or lower than expected for 8 weeks in a row (bottom pane). This chart does not include the latest week where claims came in 12,000 jobs lower than last week's revised headcount:

The direction of continuing jobless claims hints at the direction of the unemployment rate with a 2-3 month lead time. And get this: continuing jobless claims have been forming a rounding top, coming back down for the past 8 weeks as noted earlier.

Either the Fed expects the labor market to cool way faster than the current trend is suggesting, or they are cutting aggressively into what will be a rebound in growth:

Bloomberg's economic surprise index is now accelerating from its lows. Economic data is still surprising negatively more often than positively, but as this ECO surprise index approaches green territory again, growth will be surprising to the upside more often than not. That's not a recipe for imminent recession:

Growth surprising to the upside as the Fed cuts rates into it would mean rocket fuel for the bull market. Bullish for small and mid-cap stocks, bullish for gold, and of course, bullish for bitcoin. Gold sniffed out the potential for the Fed cutting into a growth rebound right away—it is up 2.8% in the days following Powell's presser:

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Bitcoin has also rallied 8.3% from its pre-FOMC level. It is up 30% from its lows set on August 5th, now challenging its 200-week moving average. If we can break above the 200d MA and hold it, it's off to the races for bitcoin heading into the historically positive month of October, and an extremely macro risk-friendly Q4:

Bitcoin is also approaching the short-term holder realized price, the average network cost basis for younger coins that drive a lot of the price action during bull markets. Another key support level for bitcoin as it makes higher highs.

After falling underneath STHRP in late mid-June, bitcoin's spot price has tried and failed 2 times to break above it. If bitcoin breaks this level and can hold it, that will signal strength and confidence in the underlying market, eliciting a reflexive loop of buying that may be the catalyst needed to send BTC out of this range it has held for 6 months.

Breaking materially above STHRP would send a clear signal that the bull market is all systems go to break this descending consolidation range, challenging $80,000, and $100,000/BTC soon after that:

Bitcoin rallies +22.9% on average during October. Are you ready?

Take it easy,

Joe Consorti

Theya is the world's simplest Bitcoin self-custody solution. With our modular multi-sig vaults, you decide how to hold your keys.

Whether you want all your keys offline, shared custody with trusted contacts, or robust mobile vaults across multiple iPhones, it's Your Keys, Your Bitcoin.

Download Theya on the App Store.