Goldman Sachs top trader: The core issue for US stocks in the coming months is "recession and interest rate cuts, who has the upper hand"
Goldman Sachs stated that in the next two months, the slowdown of the U.S. economy and the Federal Reserve's easing policy are forming a critical confrontation, and investors need to cautiously weigh the concerns of recession against the anticipation of interest rate cuts. If a deep recession can be avoided, there may still be room for U.S. stocks, but the risk of a pullback is increasing. Meanwhile, the significant downward revision of July's non-farm payroll data may signal an economic turning point, and the market has already bet on a rate cut in September. Short-term U.S. Treasury yields may further decline, and the yield curve for 2-year and 5-year bonds may become steeper
The U.S. stock market is walking on a knife's edge. On one hand, the signals of a weakening job market in the U.S. are becoming increasingly clear, and the risk of an economic slowdown is accumulating; on the other hand, market expectations for the Federal Reserve to restart interest rate cuts are also heating up. Goldman Sachs believes that the next two months will be a decisive observation period, and this tug-of-war between growth and policy will influence the next steps for the U.S. stock and bond markets.
According to news from the Chase Trading Desk, Goldman Sachs' top trader Dominic Wilson wrote in a recent research report that the core challenge for current investments is how to find investment targets that can benefit from the market's expectations of Federal Reserve interest rate cuts while also providing protection when the risk of a deep economic recession in the U.S. becomes a reality.
For the global stock market, this is also a delicate balancing act. The report points out that as long as deep downside risks can be avoided, the U.S. stock market can continue to "climb the wall of worry." However, considering that the market has already priced in a significant slowdown in growth and that recession risks remain high, the risk of a stock market correction is greater than ever.
At the same time, the market has repriced the Federal Reserve's easing path, with a high likelihood of a rate cut in September. Short-term U.S. Treasury yields still have room to decline, and under more aggressive rate cut expectations, the yield curve for 2-year and 5-year U.S. Treasuries may steepen further.
Red Flags in the Job Market: Warning Signals of a Turning Point
The non-farm payroll report for July, especially the significant downward revision of data from previous months, has completely changed the game. Goldman Sachs emphasizes that this change has shifted the attention of the market and policymakers towards the "employment" side of the Federal Reserve's dual mandate.
Although inflation caused by tariffs remains a concern, job growth has sharply declined across multiple indicators. The latest employment data paints a picture of a labor market where "hiring is limited, but mass layoffs have not yet occurred," which is more consistent with the weakness seen in other economic activities.
Goldman Sachs specifically warns that this significant downward revision is typically a hallmark of cyclical turning points in history, and therefore investors should take this weakness signal seriously.
The "downside risks in the labor market" mentioned by Federal Reserve Chairman Jerome Powell at the last press conference have now become a reality. If the unemployment rate rises further, it could reignite recession fears similar to those indicated by the "Sahm rule." Therefore, the upcoming U.S. employment reports may have an unusually strong impact on market narratives.
Countdown to Rate Cuts: Market Expectations Return to Easing Track
After the release of the July non-farm data, market expectations for Federal Reserve rate cuts underwent a significant shift. Goldman Sachs points out that the Federal Reserve is likely to restart its rate cut cycle in September.
Currently, the expectation of a rate cut in September has been fully reflected in market pricing, with expectations for rate cuts throughout the year exceeding two times. Nevertheless, Goldman Sachs still believes that the direction of short-term Treasury yields is biased towards decline. Additionally, the upcoming nomination of a new Federal Reserve chairman may reinforce the market's belief that interest rates will remain low for a longer period.
The report concludes by mentioning that if more signs of weakness appear in the job market, the market may more firmly price in earlier and larger rate cuts. In this scenario, there is ample room for the yield curve of 2-year and 5-year U.S. Treasuries (2s5s) to steepen At the same time, due to the continuous decline in market implied volatility, options products betting on the Federal Reserve accelerating the interest rate cut cycle have become quite attractive as a "recession protection" tool
