In the worst case scenario, one could speak of a contraction of the industrial sector. What about the now popular Sahm rule?
The Bank of Japan’s stumble contrasts with the Fed’s restraint.
Black Friday, Black Monday, but when the storm intensified in the markets, Tuesday of resurrection and glory. Suddenly the worst was feared and with the same speed the horizon cleared. He who kills by iron, dies by iron or makes his way by iron. The economic data sowed the suspicion of a recession. But the following batch of indicators removed the clouds. And Wall Street rebounded with relief, although it is still licking its wounds and is not completely confident.
Manufacturing activity thus suffered a setback in July, according to PMI reports. But on Tuesday, the other side of the coin became known: the robust performance of services activity. And the US is an economy largely dominated by them. Recession? False alarm. In the worst case scenario, we could speak of a contraction of the industrial sector. The economy as a whole is expanding steadily. It started the third quarter at a pace compatible with GDP growth of 2.2%.according to the combined PMI report published by S&P Global. For services, the June-July two-month period was the best of the last two years, in clear contrast to the deterioration of manufacturing activity, which almost came to a standstill in July. In addition, the evidence provides a moderation of inflationary pressures, so that the FED’s patience is not worried either.
What about the now popular Sahm rule? Driven by rising unemployment, it also signals the presence of a recession. However, Claudia Sahm, the discoverer of the regularity, begs to differ. We are not in a recession at the moment, she said, although the risks are growing. The rule sends the right message of a cooling of the labor market, but it does so with too much intensity. Perhaps this is due to very specific distortions such as the pandemic and the jump in immigration. A recession, finally, is not inevitable, Sahm acknowledges, unlike a rigid, textual application of his rule.
The recession is also not included in real-time economic forecasts, such as the Atlanta Fed’s “nowcast” forecast. From one week to the next, with the influx of new information, the third-quarter growth projection rose from 2.5% to 2.9%, approximately one point above the consensus forecast of analysts.
Bank of Japan’s stumble and Fed’s restraint
The recession was not the only threat that put Wall Street in check. The Bank of Japan complicated the situation by causing a stir in the international exchange market with a clumsy handling of its monetary policy. It was not the 15 basis point rise in its reference rate – to 0.25% – that promoted the rapid appreciation of the yen. Yes, it was the communication of an ill-calculated and unnecessary aggressiveness. The main reason for Black Monday was the looming implosion of the carry trade and the fear of a sudden unwinding of leverage. It turned out that exchange rate volatility spread to all risk markets in a very dangerous domino effect. The same Japanese authorities that caused the fire rushed to put it out.. It was not his intention to promote a policy that would produce financial instability, said Vice Governor Uchida. If the fire burned itself out it was not only because of his statements (which immediately raised the Nikkei by 10% after a 12% drop on Black Monday). If the feared recession had been confirmed, the global damage would have been enormous and unmanageable. It would not have been contained quickly no matter what was said in Tokyo.
The Bank of Japan’s stumble contrasts with the Fed’s restraint, despite strong criticism for not lowering rates at its last meeting. Nothing is more stabilising than a FED that turned a deaf ear to calls for sharp rate cuts on the fly. Nothing could have been more revealing of what is being criticized: a central bank running after events. The data that followed proved its impassive stance right. The economy is slowing down. There is no doubt about it. It is the soft landing that the FED is aiming for. Of course, there are inevitable wind holes and turbulence. Not losing composure, when the markets do, is an important contribution to keeping the markets from losing their bearings. The FED is maintaining the stance outlined after its last meeting, and before the turmoil. Like someone who is sure of where it is heading. A precautionary drop of a quarter of a point is in the cards for September. If Wall Street had any doubts about whether it would be enough, it can now breathe a sigh of relief. It’s not all artificial intelligence. At least the Fed seems to know what it’s doing.
Source: Ambito
