Fresh Data Cool Recession Fears

For the week ending 9 August 2024.

As of midday Friday, global equities were modestly lower on the week, having recovered much of Monday’s slide after US recession fears and the unwinding of yen-funded carry trades peaked. The yield on the US 10-year note gained 11 basis points to 3.93% from last Friday while the price of a barrel of West Texas Intermediate crude oil rose $1.85 to $76.10. Volatility, as measured by the Cboe Volatility Index (VIX), rose to 24.3 from 21 a week ago, having traded as high as 61 on Monday. 

MACRO NEWS

The calm after the storm

Monday’s news that the Institute for Supply Management’s non-manufacturing index rose back into expansionary territory in July after a contraction in June helped allay the fears from late last week that the US was barreling toward recession after several weak economic readings, including a subpar employment report. Non-manufacturing ISM, which covers the vast bulk of the US economy, rose to 51.4 from 48.8, while the employment subindex bounced to 51.1 from 46.1 and new orders rose to 52.4 from 47.3. When combined with Thursday’s 17,000 decline in weekly initial jobless claims to 233,000, these data don’t suggest the US economy is in danger of an impending slowdown. After a bout of extreme volatility to open the week, market calm returned as the week wore on.

US yields back to pre-payrolls level

Heading into last Friday’s weak July US employment report, the yield on the US 10-year note stood at 3.93% after the data, then plunged to 3.78% before stabilizing near 3.80% last Friday. Monday’s market freakout saw yields briefly tumble as low as 3.66% before rates began rebounding as the panic subsided. Yields rose back above 4% fleetingly on Thursday afternoon as odds of an intermeeting cut by the US Federal Reserve diminished and in the wake of tepid 10- and 30-year US Treasury auction results. Markets have priced in about a 60% chance of a 50 basis point cut in the funds rate at the September Fed meeting. With rates slumping in recent weeks, the average rate on a 30-year standard mortgage fell to 6.47% this week, according to Freddie Mac, a 15-month low. While steadier equities and the recovery in yields are welcome signs of stability, investors are wary of the sharp steepening of the yield curve in the past week. Historically, the resteepening of an inverted yield curve has been a precursor to recession. However, multiple traditional recession signals have failed to live up to their billing during this unusual post-pandemic period.

Israel on alert for reprisals

Investors are on edge in anticipation of reprisals from Hezbollah and Iran after a string of recent assassinations by Israeli operatives. On Thursday, the Wall Street Journal reported that the US warned Iran it would be taking a serious risk of major escalation if Iran were to mount a major attack on Israel. As the US tries to negotiate a ceasefire in Gaza, Hamas named its military leader, Yahya Sinwar, the architect of the attacks against Israeli civilians on October 7, as its political leader, replacing the recently assassinated Ismail Haniyeh.

QUICK HITS

Japan’s Nikkei index fell more than 12% on Monday, the second worst day on record, before rebounding 10% on Tuesday. Bank of Japan officials assured investors that it is mindful of tighter financial conditions given a stronger yen and lower equity prices and that it is in no hurry to hike interest rates further.

According to the Fed’s Senior Loan Officer Opinion Survey, fewer loan officers reported tighter lending standards in the second quarter. That’s the opposite of what you would expect if the economy were headed for recession.

The Reserve Bank of Australia held rates steady at 4.35% this week, but Governor Michele Bullock warned that that the bank won’t hesitate to hike rates if necessary.

After a week of rioting in several cities in England, Prime Minister Keir Starmer’s approval rating has declined to a net favorability rating of -18%, according to YouGov. That rating stood at zero a month ago, shortly after the general election.

After a months-long federal antitrust trial, a US district court judge rule this week that Google has an illegal monopoly on internet searches.

The minutes of the most recent Bank of Canada rate-setting meeting show that policymakers said more rate cuts are likely if inflation eases further, though the bank is not on a predetermined path.

In a surprise move Tuesday, Ukraine launched an armored incursion into Russia’s lightly defended Kursk Region. Russian natural gas continued to flow through Ukraine to central Europe on Thursday despite reports of Ukrainian forces seizing a gas transfer station in the region.

Former US president Donald Trump, the Republican presidential nominee, on Thursday proposed three debates with Democratic nominee Vice President Kamala Harris, to take place on September 4, September 10 and September 25. The Harris campaign agreed to debate in September 10, a date that had previously been agreed to by Trump and US President Joe Biden before he ended his campaign. Harris has yet to respond regarding the other proposed dates.

Also on Thursday, Trump told a news conference that US presidents should have a “say” in the setting of monetary policy. 

THE WEEK AHEAD

Employment data for the United Kingdom will be reported on Tuesday, as will US producer prices. On Wednesday, the UK and US consumer price indices will be released along with eurozone GDP. Japan and the UK report GDP on Thursday and the US will release retail sales data later that day. 

EARNINGS NEWS

With about 90% of the constituents of the S&P 500 Index having reported for Q2 2024, blended earnings per share (which combines reported data with estimates for those that have yet to report) show that earnings rose around 10.9% compared with the same quarter a year ago, according to data from FactSet. This was faster than the 6% pace set in Q1. Sales growth is up 5.2% year over year.