news

The disappointing U.S. nonfarm payrolls report for July shook confidence in a soft landing for the world's largest economy, causing global stock markets to plunge and bets on rate cuts to surge. Investors' abandonment of the popular yen carry trade played a major role in the sell-off, complicating the mapping of asset prices to the economic outlook.

Goldman SachsandJPMorgan ChaseRecently, the probability of recession has been raised to 25%~35%. For investors, after experiencing a round of panic selling, do they need to guard against related risks and spillover effects?

The job market is foggy

The U.S. unemployment rate jumped to near a three-year high of 4.3% in July amid a sharp slowdown in hiring, reaching the trigger point for the "Sam's Rule" and fueling recession fears. The rule states that a recession is underway when the three-month rolling average of the unemployment rate is half a percentage point above the prior 12-month low.

Still, many economists believe the reaction to the data is exaggerated given the potential for it to be distorted by immigration and Hurricane Beryl, a view supported by the latest jobless claims data released Thursday.

However, the normalization trend of the labor market is obvious. Job vacancies have fallen by a third after reaching a record high of 12 million two years ago. As a result, it takes longer for unemployed people to find new jobs. Nevertheless, by most indicators, the US job market remains solid.

Meanwhile, the increase in the unemployment rate is largely due to more people entering the labor force looking for work. Since January, about 1.2 million people have joined the labor force. If these people do not find a job immediately, they will be classified as unemployed until they find a job. People generally tend to enter the labor force when they think jobs are easy to find. "Companies are not laying off employees. Companies are just slowing down their hiring," San Francisco Fed President Mary Daly said last week.

“Wages are still growing,” said Dario Perkins, managing director of global macro at consultancy TS Lombard. “If you start to see wage growth turn negative, that would make me more concerned that a true recession is starting.”

It is important to note that under the uncertainty disturbances such as geopolitics, monetary policy and weak demand,CitigroupThe surprise index shows that global economic data has presented negative surprises close to the highest level since mid-2022.

Soft Landing and the Yield Curve

Affected by restrictive monetary policies, the manufacturing and real estate industries, which account for a quarter of the US economy, have been severely tested. In July, the manufacturing PMI in various regions of the United States remained below the boom-bust line. High mortgage rates and high housing prices driven by high interest rates have also impacted private real estate transactions and commercial real estate values.

The Federal Reserve signaled a rate cut in September at its most recent meeting, and Fed Chairman Powell hinted that the Fed may take action in September if inflation continues to cool.

However, the unusual volatility of economic data is sending out warnings. Some market observers are concerned that if the Federal Reserve keeps interest rates at high levels for too long, it may damage the chances of achieving a soft landing for the economy. On the other hand, if monetary policy is relaxed when the economy is relatively strong, it may reignite inflation and limit the extent to which the Federal Reserve can ultimately cut interest rates. George Catrambone, head of fixed income and trading at asset management company DWS, said: "There is reason to believe that a soft landing still exists...but the risks are two-way."

Bets on rate cuts sent Treasury yields plunging earlier this month, with the yield curve, which tracks the gap between 10-year and 2-year yields, briefly turning positive for the first time since July 2022. While a yield curve inversion has historically been seen as a good predictor of an impending recession, the curve tends to return to normal as a recession approaches.

The First Financial reporter noted that the recession probability calculated by the New York Federal Reserve based on the yield curve has returned to 56%, continuing to be at a high level since the 1980s.

Analysts say changes in credit conditions may prove more important, noting that while the risk premium on corporate bonds relative to government bonds has widened in Europe and the United States, the changes are not enough to suggest recession risks are high.Bank of AmericaThe gap between U.S. investment-grade bond and Treasury yields suggests that recession expectations are about half of those in 2022-2023.

Key commodities under pressure

"Dr. Copper" fell to a 4.5-month low of around $8,700 last week and was included in the recession watch list of many institutions.

As copper prices fell into a bear market, it reflected pessimism about the global economic outlook. China Business News previously reported that multiple factors caused the reversal of the "global economic barometer". First, the copper inventory registered by the world's three major exchanges exceeded 500,000 tons. Second, the global manufacturing industry has not yet shown signs of stabilization. Third, the US election has also brought challenges to multiple demand scenarios to a large extent. Previously, the growing long-term demand for new energy industries, electric vehicles, etc. has become the reason for investors to enter the market.

Oil prices, another barometer of the health of global demand, also hovered at a low for the year. OPEC on Monday cut its forecast for global oil demand growth in 2024 by 140,000 barrels per day to 2.11 million barrels per day, the first cut since OPEC released its forecast for oil demand growth this year in July 2023. There are currently large differences in the forecasts for oil demand growth in 2024 among major global institutions, and OPEC's forecast remains at the highest level in the industry. Weak global economic data has put pressure on oil prices as the market worries that a slow economic recovery will curb fuel consumption, which has also brought uncertainty to OPEC producers' planned production increases.

A source close to the OPEC+ alliance said the group still has a month to decide whether to increase production from October and will study oil market data in the coming weeks.

Mazen Salhab, chief market strategist for the Middle East and North Africa at international financial institution BDSwiss, said: "Investors can continue to pay attention to developments in the US economy and their impact on oil demand. With expectations changing significantly, the direction of US monetary policy is likely to remain a strong market driver."