A series of lower than expected economic data has led to the worst performance of the US stock market since the regional banking crisis in 2023, intensifying market anxiety and further increasing the possibility of unexpected interest rate cuts in September.
US stocks plummet, US bonds end inversion
After the release of non farm payroll data in August, the US stock market experienced significant fluctuations. On September 6th, the S&P 500 index fell 1.7%, with a drop of 4.2% in the past week, making it the worst week since March 2023.
Technology stocks were severely impacted, with the Nasdaq index falling 5.8%, marking the largest weekly decline since January 2022. The Nasdaq 100 index fell 5.89%, marking its largest weekly decline since November 2022; Chip stocks fell sharply, with Nvidia dropping 14% in the past week.
European stock markets were also affected, with the Stokes Europe 600 Index, Paris CAC 40 Index, and London FTSE 100 Index all experiencing declines, while Japanese and Chinese stock markets performed weakly.
The commodity market is also affected by expectations of an economic slowdown. In the crude oil market, Brent crude oil prices once fell to $70 per barrel, hitting the lowest level in nearly three years; The decline in the past week has reached 7.1%. Copper prices have also continued to decline due to weak demand, further confirming the reality of sluggish global economic growth.
Although OPEC has recently postponed its plan to increase daily oil supply by 180000 barrels in October and November, this decision is not enough to prevent a sharp decline in crude oil prices.
In the bond market, as interest rate cuts approach, the yield on two-year US Treasury bonds has fallen to 3.66%, hitting a two-year low. The yield of 10-year treasury bond fell to 3.72%, ending the 26 month long inverted yield curve.
This change has significant implications for the financial market. The inversion of the yield curve is often seen as a warning signal of an economic recession, and the end of the inversion means that the economic outlook may be undergoing significant changes. From historical experience, the end of inversion is often a precursor to economic recession.
Many economists and market analysts believe that the return curve returning to normal from inversion means that the accumulated economic risks have begun to emerge, and the downward pressure on the economy has increased. In the short term, the US economy may face huge challenges.
Expectations of interest rate cuts have changed
Recently, several senior officials of the Federal Reserve have spoken out, further exacerbating market anxiety.
The dovish remarks of Federal Reserve Governor Christopher Waller and New York Fed President John Williams have strengthened market expectations for the possibility of a rate cut. Williams pointed out that the Federal Reserve has made progress in achieving price stability and maximum employment goals, and the current economic situation provides a reasonable basis for interest rate cuts.
Waller expressed support for interest rate cuts and is open to early rate cuts. He pointed out that there are some downside risks in the US job market, but the overall situation has not worsened, and he does not believe that the US economy is heading towards recession. Similar to Waller, Williams believes that the Federal Reserve has made significant progress in stabilizing prices and achieving employment goals, and the current rate cut is appropriate.
The market has reacted cautiously to this and is concerned about whether the Federal Reserve can grasp the rhythm of precise response. After the release of non farm payroll data, pessimistic sentiment dominated, and the probability of the Federal Reserve cutting interest rates by 50 basis points in September increased from 40% to 50%. Subsequently, the market calmed down and began to reassess officials' speeches, with expectations falling back to 30%.
Morgan Stanley analysts point out that if CPI data in the coming months shows a sustained decline in inflation, the Federal Reserve may choose a more moderate pace of interest rate cuts. But if inflation persists or rebounds, the Federal Reserve's policy path may become more complex, and even postpone its interest rate cut plan.
Analysts from Bank of America believe that the job market is weak, but the Federal Reserve still relies on inflation data to adjust its policy stance. If inflation continues to approach its 2% target, the Federal Reserve may adopt a more aggressive interest rate cut strategy to ensure that economic growth is not suppressed by tightening policies.
Goldman Sachs stated in its report on September 6th that senior Federal Reserve officials are inclined to cut interest rates by 25 basis points in September. Williams and Waller's speeches indicate that if the labor market further deteriorates, the Federal Reserve may consider a 50 basis point rate cut at subsequent meetings.
Expected soft landing
The market's concerns about the economic recession in the United States have not been ruled out. Zhongtai Securities believes that since the beginning of this year, the US stock market has repeatedly hit new highs, and investors are concerned that the US economy is at the end of its strength, and any signs of economic recession may be amplified.
However, the market believes that the non farm payroll data for August is "confusing" and lacks clear guidance, which reduces the credibility of the data. Zhongtai Securities believes that investors should pay more attention to the upcoming August inflation data, which will have a more direct impact on the decision to cut interest rates in September. Due to frequent adjustments in non farm payroll data and statements from Federal Reserve officials, the trend of inflation is the key factor determining the magnitude of interest rate cuts.
Institutions believe that the US economy has a chance for a 'soft landing'. China International Capital Corporation (CICC) believes that since the second quarter, inflation in the United States has slowed down, economic growth has remained strong, and the possibility of a "soft landing" is increasing. Generally speaking, the central bank raises interest rates to curb inflation, but it can lead to excessive credit tightening, which in turn can trigger an economic recession. But this time the situation is different, as improvements in supply can help alleviate inflation without harming the economy, creating conditions for achieving a 'soft landing'. There are four key supply factors worth paying attention to: firstly, the recovery of the supply chain has reduced the price pressure of tradable goods; Secondly, China has exported relatively cheap physical resources to the United States, reducing import costs; Thirdly, the influx of immigrants has increased the supply of labor, alleviating labor shortages and wage pressures; Fourthly, productivity improvement has reduced unit labor costs and eased the pressure on enterprises to raise prices due to rising production costs. China International Capital Corporation (CICC) expects the Federal Reserve to adopt a gradual interest rate cut, which may even be a "stop and go" approach.
China International Capital Corporation (CICC) pointed out that contrary to the intuitive feeling of the market, the performance of the US stock market in the second quarter did not significantly slow down, and overall it is still accelerating. However, market concerns cannot be ignored, such as the slowdown in the growth rate of technology companies, which have become a "source of volatility" due to high valuations and profit margins, the slowdown in low-end consumption due to residents' pursuit of cost-effectiveness, and the continued bottoming out of cyclical sectors such as real estate and manufacturing.