Last week wrapped up with crypto currencies experiencing their largest one-day crash in history, with over $19 billion liquidated across exchanges in a matter of hours. Bitcoin fell 14%, Ethereum dropped 12.2%, while lesser known altcoins like DOGE and AVAX saw losses in excess of 60%. The crash trickled into other markets as traders sought safe havens. The 2-year Treasury fell 11 bps and the S&P 500 lost a combined $1.2 trillion in market cap while the VIX rose 30% in response to the crash. Stocks surged in the middle of the week on strong earnings reports from the big banks. This was short-lived as they retreated by the end the week due to news of significant fraudulent loans at a pair of regional banks. This resurrected market jitters and caused 74 of the largest U.S. banks to shed over $100 billion in market cap.
The Fed’s Beige Book was released this week and noted U.S. economic activity remained largely unchanged in recent weeks with employment levels holding steady. Consumer spending fell slightly as prices continue to rise in some regions faster than others. Most districts reported more employers reducing headcount through layoffs and attrition, citing weaker demand, lingering economic uncertainty and investment in artificial intelligence.
In prepared remarks to the National Association for Business Economics in Philadelphia, Fed Chair Jerome Powell signaled the central bank may begin to stop or further slow the balance sheet runoff that has been taking place since 2022. During his speech, Powell alluded to a previous comment in which he said the plan was to stop balance sheet runoff (known as Quantitative Tightening) when reserves were at or near a level considered “ample” as opposed to “abundant.” He added, “The committee’s plan lays out a deliberately cautious approach to avoid the kind of money market strains experienced in September 2019,” ostensibly referring to the “taper tantrum” that preceded the Pandemic. He acknowledged further weakness in the labor market but noted the recent labor revisions have put us in a position where the risk of higher inflation and lower employment are in closer balance. Interest rate futures show a 95% probability of two additional quarter point cuts this year.
As of today, government funding has lapsed for a total of 17 days, marking the longest government-wide shutdown in U.S. history, with no real end in sight. To be sure, there have been longer partial shutdowns, but this streak beats the previous record of 16 days in 2014. In any event, the House failed to pass a measure this week for the 10th time and lawmakers are scheduled to depart for the weekend, meaning the shutdown will be expected to last at least 20 days.
KEY INDICATORS THIS WEEK
There were no significant economic reports released this week due to the shutdown.
Next week - CPI was postponed until October 24.