The ghosts of stagnation are being dispelled. The rate cut, on the other hand, is real. What can be said about the “carry trade”?
Wall Street found strength from its weakness. Global stock markets are doing well.
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Recession? Where? Retail sales, which had declined 0.2% in June, rose 1% in July. In the US, consumers have not realized that these are stormy times in the world of finance. And they do what they always do. They spend. They complain about high prices, they look for discounts more than before, but they spend. The core of retail sales, the portion that best correlates with the consumption of the national accounts, grew for the third consecutive month. It tied for a 0.3% advance above June’s robust 0.9%. That being the case, expansion is not up for debate. Its progress is healthy. Private consumption, the lion’s share of aggregate demand, is projected to improve solidly – closer to 3% than 2.5% – in the third quarter. and drives away the ghosts of stagnation.
However, the labour market has cooled its momentum. The unemployment rate rose half a point from March to July inclusive. Its level is still low – 4.3% – but the magnitude and speed of the jump is very significant. So why is it that consumers are not taking notice? Employment (and real wages) also grew. More than 700,000 net jobs were created in the period mentioned.
Rising unemployment is fuelled by a sustained expansion of the workforce. Monthly additions – newcomers and re-entering workers – are not being fully absorbed. Layoffs, on the other hand, are not increasing. Their level in July was the lowest in two years. And if the sudden increase in unemployment benefit applications two weeks ago led one to think otherwise, it has now been corrected. Hurricane Beryl, which briefly passed through Texas, and some temporary closures of automotive plants were to blame for the fleeting upturn. Above all, there are no signs of permanent damage.
And what about the carry trade? The Bank of Japan created a ruckus and then rushed to calm the waters. What a shock it was. The dark grey Friday and, above all, Black Monday are proof of this. Suddenly, the yen went from victim to victimizer. And, at the same time, the Sahm rule sounded the alarm of a recession. The anxiety was great, although brief. With the yen stable, Japan has no urgent monetary policy agenda. And the US, as has already been said, is not in a recession. How long did it take to solve both mysteries? The blink of an eye. And what happened to the other spectre, that of a gigantic global margin call? It had no time (or reason) to happen.
The potential danger of a massive call to replace collateral – to cover losses from unbalanced or debt-leveraged positions – mutated into a reverse call, from clients to their brokers. The instruction: “buy the dip.” The dip was bought. All over the world. In Japan, official figures reveal that the portfolios of institutions added more exposure to foreign assets. When bad weather passes, put on a good face. In the US, corporate (and insider) buybacks soared. Bank of America and Goldman Sachs reported a flood of client orders. And cash, which flows and accumulates in money market funds and bond funds, also poured into equity ETFs.
For the bull market, life continues without incident
The false alarm of the recession aborted the possibility of a drastic “margin call”. Those who had to dismantle their carry-out business in a hurry were able to do so in liquid markets, albeit at low prices. Those who delayed will be able to get out now, if they still don’t want to, almost without breaking a sweat. However, the temptation now is not to sell but to take positions. The bull market has been put to the test. And it has found strength from its weaknesses. Life continues without any surprises.
As if nothing had happened, the S&P 500 returned to the 5,500 point threshold. It was on the verge of a textbook 10% correction. And with the same speed, up 3.9% in its best week of the year, it was within striking distance of the records. It is still frolicking just 1.99% below. It advanced 17.11% in the year and how can we convince it now that there will be no more. The world’s stock markets are doing well. They had their best week in the last nine months. For the battered Japanese Nikkei it was the best in four years, although its recovery is less vigorous.
The recession proved to be a false alarm. The rate cut, on the other hand, is real. The ten-year rate sank comfortably below 4%. And the Fed already gave a nod to the debut of the pruning of short-term rates on September 18. Powell will explain this in detail at the annual Jackson Hole conference. There are plenty of reasons. Retail inflation in July -0.2%- was OK. The decline in the construction of new housing units suggests a double-digit drop in residential investment (a sector particularly sensitive to the interest rate).
To ensure that the recession remains a failed forecast, it is best to prevent any potential clots. Austan Goolsbee of the Chicago Fed has a short list of yellow flags that include unemployment and rising defaults by small companies. In such a scenario, providing a quarter-point aspirin is not a problem. It would be just the first in the blister pack. And even the bears know that this time the Fed has several boxes available.
Source: Ambito
