US equities have already erased losses from global selloff
We ended our last Midweek Macro on the recent global selloff noting that much of the losses had already reversed.
Since then, that trend has continued.
Looking at returns since August 1 (the day before the unemployment rate rose to 4.3%, triggering the Sahm Rule):
- Japan’s Nikkei is already back to even (chart below, red line)
- The S&P 500 is +3% higher than it was (orange line), and within 1% of its record high
- And the Nasdaq-100 is +4% higher than it was (blue line).
A big reason why markets have rebounded is that we’ve gotten a few economic data reports that pushed back on US recession fears.
Jobless claims show layoffs remain low and the labor market remains solid
Since it was the unemployment rate that reignited recession fears, there was a lot of focus on jobless claims.
Then we got back-to-back weeks of falling initial claims for unemployment insurance (chart below), which remain low by historical standards. This is consistent with the unemployment rate rising more because of people joining the labor force than from increased layoffs.
Retail sales rising +1% in July and Walmart’s earnings report show the consumer remains relatively resilient
There’s also been some concern about the health of the consumer lately, in part because of Q2 earnings reports warning of consumers cutting back on spending.
These worries were calmed a bit when Walmart’s Q2 earnings beat expectations and they upped their full-year sales guidance.
That same day, national consumer spending data came in stronger than expected, rising +1% m/m, and seeing broad-based gains (chart below). So, even though consumer spending growth has slowed, spending is still rising.
Inflation continues to slow and is nearing the Fed’s target, giving Fed more reason to cut rates
Of course, the Fed’s big concern remains inflation, and we got good news on inflation, too.
The latest CPI data showed headline inflation slowing to 2.9% YoY (chart below, orange line), and core inflation easing to 3.2% YoY – a three-year low – as inflation has normalized across most categories.
In fact, nearly 90% of inflation in July was just housing (+0.5% m/m). Still, that wasn’t enough to prevent core CPI from slowing, and core CPI ex housing inflation is back below 2% YoY (chart below, red line).
In short, inflation is already close to the Fed’s 2% target, and it’s trending lower.
Treasury yields still lower as markets see more rate cuts than before unemployment data
That means it’s time (if not past time) for the Fed to cut rates. And rate cut expectations are one area that haven’t fully rebounded (chart below).
Prior to the unemployment data, markets were pricing 85bps in rate cuts this year. Immediately after the unemployment report, that spiked to 125bps amid talk of an emergency rate cut.
Following better labor market, spending, and inflation data, though, expectations have since come back down to 100bps (that’s why 2-year Treasury yields, at 4%, are still 15bps lower than they were to start the month).
So markets are less worried about recession than a couple weeks ago, but rate cuts are needed to secure a soft landing.
We’ll get a better sense if markets are right about these rate cuts at the end of the week when Fed Chair Powell gives his annual speech at Jackson Hole. Hopefully it keeps the market recovery going.
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