Investment Manager Reveals: Financial Market Mood Swings – What You Need to Know
The mood in the financial market is changing rapidly. Just over a week ago, there was a gloomy atmosphere with recession fears looming over us after weak purchasing managers’ indexes for the industry, essentially worldwide, and a surprisingly weak job growth in the US when the July numbers were released. At the same time, there were significant shifts within and between different asset classes, driven in part by the closing of carry positions in the Japanese yen (temporarily?). The Bank of Japan Governor Ueda was quick to provide reassuring statements about the future ultra-easy monetary policy.
Now, smiles are back on the faces of many investors. For example, the US S&P500 index has now recovered all the steep decline from the beginning of August.
The mood in the financial market began to turn slightly when the purchasing managers’ indexes for the service sector showed continued decent growth, especially in the US. Further momentum for risk appetite came from the weekly statistics on the number of initial jobless claims in the US unexpectedly decreasing, breaking the worrying trend it had been in since late spring.
This week, new weekly figures confirmed that the upward trend in new jobless claims had been broken. This may seem like a small straw to hang a massive, global stock market rally on, but further confirmation of the continued decent pace in the US economy came on Thursday in the form of stable figures on industrial production in July and a surprising boost for retail sales in the same month. The American consumer has not thrown in the towel.
This has contributed to many (but not all, it is important to note) significantly reducing the probability of a deeper US economic downturn. At the same time, the number of interest rate cuts expected from the Federal Reserve this year has also decreased. The 50-point cut at the September meeting that seemed more or less certain during the turbulent days is now much more uncertain. Pricing in the bond market now indicates a 33-point cut in September, while uncertainty is rising about how many rate cuts the Fed will deliver this year. This is evident in a sharp rise in short market interest rates. The policy-sensitive two-year rate is now slightly above 4 percent.
How this will play out in the short term remains to be seen. Important for the view on both the economy and interest rates will be the employment figures for August released at the beginning of September and, at least in the latter case, the speech that the Fed chair will give next Friday at the central bank symposium in Jackson Hole.
Right now, it seems that many in the market have started focusing on the “dream scenario” of falling inflation and rates paired with a stable US economy. What is missing from the dream perspective is probably the same development in Europe and a pickup in the Chinese economy. If this turns out to be the case, this is likely just the beginning of the stock market rally.
However, there are some factors that could cause trouble in the fall and make it a bumpy ride for the stock market. These include geopolitics, US domestic politics, and a global economy that is struggling to gain traction. Inflation is also a potential concern, although most indicators are now pointing in the right direction.
In conclusion, the financial market is experiencing a shift in sentiment towards a more optimistic outlook, driven by positive economic indicators and potential policy changes. Investors should keep an eye on upcoming data releases and speeches from central bank officials to gauge the future direction of the market. It is essential to stay informed and be prepared for potential challenges that may arise in the coming months.