Market turbulence deepens: Fed caution and valuation concerns weigh on risk assets

It has been a rather grim month for risk assets so far this year, with global equity benchmarks on track to notch up their worst weekly performance since April's tariff-induced wobble. This comes on the heels of stretched valuations, AI scepticism, and hawkish tones from Fed officials.

The S&P 500 shed 1.6% to 6,538, the Nasdaq 100 fell 2.4% to 24,054, and the Dow dropped 0.8% to 45,752. All but the consumer staples sector wrapped up the session in the red, with notable losses across tech (3.1%), industrials (1.7%), and consumer discretionary and materials (1.5%, respectively). Additionally, the VIX continued to punch higher, extending gains north of 20.00.

The crypto space continued to navigate lower levels in recent trading, with the major BTC/USD pair tunnelling south of US$90,000 and clocking lows not seen since earlier this year. The USD, however, finished the session largely unchanged, establishing what many chartists call an ‘indecision candle’.

Mixed Fed messaging – US September jobs data lands

We have been flooded with a truckload of Fed speak in recent sessions, which has echoed a cautious/hawkish vibe.

Governor Michael Barr urged caution regarding further rate cuts, as inflation remains above target, while Cleveland Fed President Beth Hammack warned that premature easing could prolong high inflation and elevate financial stability risks. Chicago's Austan Goolsbee also expressed concerns about a December cut. However, countering this view, Governor Stephen Miran stated that policy remains restrictive and should be eased to neutral.

The delayed September US payrolls data, which landed yesterday, showed the economy added 115,000 jobs. This easily surpassed the market’s median forecast of 50,000 and came within touching distance of the 120,000 upper estimate. Despite the upside surprise, unemployment rose by 4.4%, which exceeded the median forecast of 4.3%. Although the headline number caught many off guard, with the whisper number below the median, job growth was concentrated in hospitality and government.

With the Fed now in the data darkness until after December’s meeting – October’s jobs data has been shelved, and November’s print will not air until 16 December – and the majority of policymakers erring on the side of caution, it should not raise too many eyebrows to see investors pricing in a meagre 7 bps of easing (30% probability) for the upcoming rate decision. As of writing, the market is expecting the Fed to resume easing at the January 2026 meeting (22 bps of cuts implied).

What lies ahead?

Looking forward, the next week promises little respite, with investors likely to continue questioning whether AI spending will deliver returns. Stretched valuations, AI concerns, a cautious Fed, and persistent inflation suggest that the path of least resistance remains to the downside. And while this remains a theme, selling short-term rallies could be the order of the day.

The economic data calendar remains relatively light next week due to lingering effects from the US government shutdown. However, Wednesday is expected to be busy. The October Aussie CPI inflation report and an update from the RBNZ (projected to cut the official cash rate by 25 bps to 2.25%) will make the airwaves during the Asian session, followed by a potential read on US GDP (Q3 25) and the US October PCE inflation numbers. Of course, the UK’s Autumn Budget will also be widely monitored for fiscal measures affecting taxation, public spending, and economic growth as Chancellor Rachel Reeves delivers Labour's second Budget since taking office in July 2024.