A tumultuous stretch as the markets eagerly look towards an initial rate cut…
- In early August, the broader stock market collapsed almost 7% in a matter of days on the back of July’s weak jobs report and the unwinding of the yen “carry trade.” Non-farm payrolls came in sharply beneath expectations at 114k as opposed to the forecast of 190K. Additionally, the U.S.’s unemployment climbed to 4.3%, and above the market’s expectations. Exacerbating the issue was trader’s efforts to unwind previously cheap borrowings in Japan as the yen climbed sharply relative to the US dollar following an unexpected rate increase by the Bank of Japan.
- In subsequent days, the market largely recovered these recent losses as concerns over economic growth abated. Correspondingly, the market’s volatility index, which had soared by more than 100% amidst the market’s sharp decline, slid back to prior levels in subsequent days as the market recovered most of its losses.
- Based on the most recent data, expectations are strongly fixed upon a central bank rate cut following their September meeting. Today’s Consumer Price Index release showed continued cooling with a 2.9% overall year-over-year price increase for July -providing further support to the thesis that inflation is sufficiently moderating and keeping the Federal Reserve teed up for an initial interest rate cut in September. Beating expectations of 3% and printing a sub 3% annual rate for the first time since March 2021, the data release provides evidence that the fight against inflation is succeeding.
- However, in an attempt to dampen expectations, recent comments from Fed leadership have echoed Chair Powell’s prior messaging that the Federal Reserve will remain data dependent on potential rate cuts and, therefore, that a September rate cut is not yet assured. Conversely, there are increasing fears that the central bank’s reluctance to cut rates may already have set the economy on an inescapable path to recession.