Stocks & Bitcoin Tank As US Job Growth Comes Up Short

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Cliff-Notes:

• August NFP growth came in higher than last month but missed estimates, adding 142k jobs versus the 165k estimate.
• The unemployment rate fell to 4.2%, as expected, but downward revisions for June and July show weaker job growth than initially reported.
• The market anticipates slower, more measured Fed rate cuts, which is seen as bullish for risk assets like Bitcoin and equities.

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Job growth is slowing, with August's NFP growth coming in higher than last month but lower than what analysts were expecting:

• Change in Nonfarm Payrolls: 142k vs 165k estimate, up from 89k prior
• Change in Private Payrolls: 118k vs 140k estimate, up from 74k prior
• Unemployment Rate: 4.2% vs 4.2% estimate, down from 4.3% prior

Of course, both prior months were revised lower: July was revised lower by 25k jobs, and June was revised lower by a whopping 61k jobs. Hiring is slowing but it is still happening. This makes 4 of the last 5 nonfarm payrolls reports that have missed expectations:

The unemployment rate also fell just as analysts expected it to—down from 4.3% to 4.2%. Given the ascent of the unemployment rate is slower than prior cycles, the timing of the Fed's rate cuts, set to begin in a week and a half, makes sense:

Traders are now hedging around labor market reports as the Fed's main focus shifts from sticky inflation to keeping the labor market intact. Today's good nonfarm payrolls report slashed the odds of a larger 50-bps rate cut from 50% to 25%. A smaller, more incremental rate cut of only 25 basis points, or 0.25%, is basically locked in barring any unforeseen events in the labor market or financial plumbing over the next week and a half:

Markets think the Fed will be able to cut at a slower, more measured pace rather than cutting faster to put a floor underneath an imminently deteriorating labor market. This is bullish for risk assets.

The spread between the 2-year US Treasury yield is now inverted to the Federal Funds rate by 180 basis points. 2s act as the preferred proxy for Fed Funds expectations, and the market believes that 181 basis points of aggregate rate cuts from the Fed are in order over the next two years:

There has been a lot of talk that the US Treasury yield curve normalizing (short rates falling back below long rates) signals imminent recession. Here's why that's not exactly true. It all depends on how the yield curve is normalizing. We are experiencing a bull steepener, wherein long-term interest rates are falling while short-term rates decline even faster.

Falling long-term yields make borrowing cheaper for businesses and consumers, which spur investment, spending, and overall economic growth. With the yield curve normalizing, banks can now borrow short and lend long profitably once again. With the Fed almost out of the woods and now managing growth concerns by cutting rates in a slow and measured manner, the yield curve normalizing is not a big concern of mine right now:

Muted credit spreads signal confidence in the economy because they indicate that investors don’t see much additional risk in lending to companies versus the government. When spreads are narrow, it shows the market believes companies are financially stable and unlikely to default. This translates to lower borrowing costs, which helps businesses invest and grow without heavy debt burdens.

It also reflects positive market sentiment, with investors comfortable accepting lower returns, suggesting they see the economic backdrop as stable.

Credit spreads are at historically narrow levels, pointing to a calm and optimistic financial environment, boding well for businesses and therefore, for the broader economy. Widening credit spreads would portend growth concerns due to tighter borrowing conditions, but that is not what we are seeing right now:

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There are a few caveats to this somewhat cooler-than-expected labor report. For one, foreign-born workers saw an increase in jobs of 635k, while native-born workers saw a decline of 1.33 million jobs. While this is not a bad thing by any means, it helps explain why middle America feels destitute and still unable to make ends meet despite red-hot economic data. A robust labor market on the surface is in reality leaving most of America's heartland out of the equation, and headline strength can primarily be attributed to gains from immigration. This also helps explain the political shift towards nationalism and away from globalism:

The less-utilized but broader U6 unemployment rate also rose to a three-year high of 7.9%, in contrast to the U3 UNR (that fell) which helps guide monetary policy decisions. This also helps to explain some of the disparity between headline data and the way that Americans are actually feeling about the labor market:

Bitcoin is down-only since the FOMC meeting. Powell's post-FOMC dovish remarks pumped BTC by $4,000, but shaky labor market data since then has raised uncertainty about how much longer the labor market can hold on. This has created a slow bleed in risk assets, seen most prominently in Bitcoin, which is one of the best risk sentiment signals available in financial markets today. Bitcoin is down $10,000 from late August when it hit a local top after Powell's presser:

Bitcoin is approaching the bottom of this range that it has held all summer. Now trading underneath the 50, 100, and 200-day moving averages. It is also below bitcoin's short-term holder realized price, the average purchase price for the main cohort of bitcoin investors that come around during bull markets. This is a more flighty cohort of BTC investors, and as the price drops further below their average entry point, the risk that they start abandoning ship and cutting their losses rises. All eyes are on whether or not we can hold this range:

It was nearly a record-high for the S&P 500 last week, but we've had a very large correction this week. The S&P 500 is down 4.33% on the week, headed for its worst week since the March 2023 bank crisis:

Equity volatility is rising, as seen by the VIX jumping from ~15 to above 20 this week. This signals increasing uncertainty in the markets, with investors anticipating sharper price swings. Many investors are sitting on cash, taking some risk off the table, and bidding up Treasuries until we have more clarity around the Fed's ability to navigate its cutting cycle without turning over the labor market:

The S&P 500 failing to break above its previous all-time high last week paired with this week's correction and abysmal Friday price action is likely increasingly making investors spooked, or cautious at the very least. This is evidenced by the VIX, the market's fear gauge, rising as implied options volatility moves higher.

Bitcoin is showing where stocks are headed, as it always has. Stocks were dragged higher throughout this year and into the summer thanks to players like Nvidia and the AI boom. While business borrowing conditions are still favorable, much of that boom has faded. Now that the initial boom from these stocks is fading, price action in the stock market is looking more like Bitcoin:

US job openings have fallen by 3.3 million as the S&P 500 has risen 2000 points. In 25 years, this has never happened before. We've never had a rising stock market without corresponding job growth. What is underlying the stock market? Expanding "price-to-innovation" ratios? I'll tell you what it is: money printing. As business fundamentals take a backseat to unfettered money printing, stock prices are increasingly divorced from the reality of the US economy. And if you're ultimately now buying asset prices purely as a proxy for money printing, why not buy the one that is absolutely scarce instead of receipts of ownership in a company that are infinitely issuable? This is why we Bitcoin:

Final thought: Markets are getting exciting again. Buckle up.

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.