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Today is undoubtedly one of the historic days, and Bitcoin price is showing shallow volatility at the time of writing. The Sahm rule has been triggered, Bloomberg announced it, and something significant is about to happen. The fact that stock markets have wiped out 3 trillion dollars in a single day also tells us the extent of the panic.
Summary
Today’s employment data came worse than the Fed wanted. Powell said on Wednesday that we don’t want to see more cooling in employment. The unemployment rate was expected to be 4.1% but was announced at 4.3%. Fed member Goolsbee said we won’t panic over a single month’s data, but persistence above 4.1% could prompt the Fed to act.
Gold is rising rapidly, the Sahm rule is signaling an early recession, and this week’s earnings reports from trillion-dollar giants were poor. The result? A loss of 3 trillion dollars, and the stock markets have not yet closed.
What is the Sahm Rule?
This is a recession indicator used by the US Fed to determine when a recession has occurred. It monitors unemployment data from the US Bureau of Labor Statistics (BLS). Where does the name come from? It comes from economist Claudia Sahm, who worked at the Federal Reserve and the Council of Economic Advisers.
In a report prepared by the Brookings Institution on the use of fiscal policy to stabilize the economy during a recession, Sahm, who gave her name to this rule, wrote a section on economic well-being. It discusses a fiscal policy that proposes automatic stabilizing payments to citizens for economic well-being. The main conditions to trigger the payments were outlined in this report and named the Sahm rule.
The Sahm metric signals a recession when it rises above 0.5%. The Sahm Recession Indicator is technically triggered when the three-month moving average of the national unemployment rate (U3) increases by 0.50 percentage points or more compared to the lowest level of the previous 12 months.
Sahm Rule Triggered
According to a Bloomberg report, this has been triggered. Historically, this rule has been triggered early in every recession since 1950. In the same time frame, it has only given a false positive once, in 1959, and even then, it was only six months before a recession occurred.
It’s not hard to understand whether this has been triggered. The three-month average unemployment rate is 4.1%, half a point higher than the lowest level of the past 12 months. Moreover, for July, this figure is 70bp higher. Fed member Goolsbee said in his speech a few hours ago that an unemployment rate above 4.1% should prompt the Fed to act, and we won’t panic over a single month’s data. A small detail to add is that PMI data has not been good for a long time, which supports the economic stagnation (recession) narrative.
3 Trillion Dollars Wiped Out
The recession was confirmed with today’s data. For a long time, employment was strong due to part-time jobs. However, in the last few months, institutions have been revising employment data in favor of a recession. The Fed has persistently kept interest rates at the ceiling for a year and did not relent in this week’s meeting despite inflation falling to 3%.
Businesses are struggling, trillion-dollar companies are reporting below-expectation earnings, and the days when the Fed needs to act swiftly have arrived. It wouldn’t be surprising if Fed members or Powell himself announced a 50bp cut in September.
The other possibility is waiting for August data to see September and if there is no significant improvement, they might start talking about a 50bp cut in September + a potential cut of 100bp or more this month.
Or, due to the current 3% inflation for the 2% target, they might not cut in September either, pushing the US into a hard-to-recover economic stagnation. This could cause massive destruction in stock markets worldwide.
What Happened in the Last Week?
What developments have occurred in the global economy in the past week? The Kobeissi Letter summarizes it as follows:
- Japan’s stock market recorded its biggest daily drop since 2020.
- The US unemployment rate rose to 4.3%, the highest level in the last 3 years.
- Starbucks, $SBUX, reported a 6% drop in store traffic.
- Intel, $INTC, wiped out one-third of its value in one day.
- Amazon, $AMZN, fell with lower-than-expected revenue.
- The 10-year bond yield fell by 40+ basis points in one week.
- The ISM Manufacturing Index fell to 46.8, the lowest level since August 2023.
- JPMorgan predicts the Fed will make half-point rate cuts in both September and November.
- Citi forecasts a half-point Fed rate cut in September and November.
Powell’s soft landing narrative seems to have disappeared due to pushing the limits.
Conclusion
The Fed seems to be forced to signal that it will cut rates. This means more upside for crypto, gold, and silver. Gold is used as collateral in portfolios, so when people receive margin calls, they run to cash or cash equivalents, which is why it is steadily rising. This logically means it rises while stock markets and markets are weak.
