Investment Manager Reveals: Global Markets React to Economic Slowdown Concerns
The financial markets have faced a tough start to August as focus shifts from inflation to the economy. Global stock markets have plummeted and interest rates have fallen sharply in most places. Concerns have been raised by weaker growth signals from China and Europe, and now there are also questionable economic signals coming from the USA.
This is evident in the unexpected rapid increase in new unemployment benefit claims and the fact that Thursday’s US Purchasing Managers’ Index for the industry dropped to a low of 46.8. Well below the 50 level that typically marks the boundary between growth and decline.
Investors anxiously awaited Friday’s US employment report for July, with employment rising by 114,000 compared to the expected 175,000, while the June figure was revised down from +206,000 to +179,000.
Unemployment rose to 4.3 percent in July, where it was expected to remain at 4.1 percent. It’s important to note that the unemployment rate comes from a household survey, while employment figures are based on surveys of companies.
Furthermore, the pace of wage growth continues to slow down, with the average hourly wage increasing by 3.6 percent in July. The lowest rate of increase since before the pandemic.
Just a few weeks ago, this might have been good news as the market would have been gearing up for future rate cuts. Now, the focus is on whether the economic slowdown is happening too quickly and if the Federal Reserve, which left its interest rate unchanged in Wednesday’s announcement, has fallen behind in terms of rate cuts (behind-the-curve). This could risk creating a hard landing for the US economy instead of the soft landing that everyone, including the central bank itself, had hoped for.
While the numbers will be scrutinized in detail, initial market reactions have been predominantly negative. The general analysis among market participants is that the Fed “should” have cut rates this week.
The next Fed announcement is not until September 18, and a 50-point rate cut seems highly likely at that time. At least if the turbulence in the financial markets continues and we receive more weak economic signals. We also believe that panic may already be spreading among members of the Federal Open Market Committee (FOMC), leading to a rate cut even before then.
In conclusion, the financial markets are reacting to concerns of an economic slowdown, with potential implications for investments and financial decisions. It is important for investors to stay informed and monitor economic indicators closely to make well-informed decisions in these uncertain times.