US Economy's Astounding Two-Week Recovery: All Eyes on Jackson Hole for Central Bank Insights
19 August 2024, 14:48
Just over a month ago, many observers will recall that the second quarter US earnings season was falling short of expectations.
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Then some worrying economic data, such as anaemic non-farm payroll employment data appeared on the horizon.
Add to those worrying sets of statistics the frothy valuations of some high-profile tech companies, whose share prices had been driven almost to an extremity by ‘AI’ hysteria, resulting in a strong, acrid cocktail of fear inevitably starting to evolve.
The economists and analysts then start to mass their troops, who become restless and start muttering ‘recession’ under their breath.
This is followed by the blame game. Market observers and the teenage scribblers began to criticise the FED for failing to start cutting interest rates in July.
Consequently, a combination of market concern and a plethora of ‘tsunami’ algorithms and programme trading saw many global equity markets wilt under intense pressure.
Between 16th July to 5th August 2024 the S&P 500 surrendered 6.4%, the NASDAQ Composite by 9.35%, the NIKKEI 225 by a gargantuan 21.60% and the Hang Seng by 6.07%.
The global ‘sell-off’ was exacerbated by a surprise rate hike in Japan, which triggered significant unwinding of billions of dollars of a popular Yen carry trade financing the purchase of risk assets, including Japanese equities.
The FTSE did not suffer ‘the slings and arrows of outrageous fortune”, only losing 2.38% in the same period. It is also interesting to note that since April 2024, the FTSE has outperformed Germany’s Xetra Dax and France’s CAC 40.
The Japanese economy has experienced a bit of wobble in recent months. However, real GDP growth is anticipated to begin to recover in the second half of 2024.
Official interest rates have been raised from zero to 0.25%. This hike in the cost of borrowing by the Bank of Japan is only the second in 17 years, as it tries to normalise monetary policy in the world's fourth-largest economy.
This move by the Bank of Japan goes against the grain of the Federal Reserve, the ECB and the Bank of England’s MPC, all attempting to alleviate the cost of borrowing, provided inflation can be kept on a tight rein.
Notwithstanding these issues, few market acolytes wanted to believe that this ‘sell-off’ could be a signal for recession in the US. Surely, this market ‘shake-out’ hardly reflected an economy which posted GDP a second-quarter GDP reading of 2.8% on an annualised basis and was heading for recession at the end of the year.
In recent days, we have seen encouraging retail sales in the US – up 0.5% in July, with groceries and improved car sales in the vanguard. Walmart’s last quarter figures were mighty impressive, with sales totalling $169 billion for the period – up 4.2%, resulting in the shares bouncing by 6.5% on the day of their announcement and 37.8% up year to date!
Inflation data in the US has been relatively benign, falling from 3% to 2.9% on an annualised basis in July.
The FED has been virulently criticised for not cutting rates on 31st July. Pressures on the consumer have been such that their cry from the wilderness has fallen on deaf ears.
However, the consensus is of the opinion that a 25-basis point cut from 5.25%-5.5% should be answered on the 18th of September and provided there is no bounce in the current level of inflation; another 25-basis point cut could be on the cards by the end of the year.
In concert with an expected fall in interest rates, bond yields have dipped sharply below 4% in the hope that expectations are not dashed.
Market protagonists seem to have made up their minds that the July/August ‘sell-off’ was overdone and that the idea of a recession in the US was fanciful and ill-founded.
Consequently, in double quick time, markets have rebounded sharply, with the S&P 500 currently trading just above 16th of July’s levels, with the NASDAQ Composite trading within spitting distance.
So, having recovered their poise, equity and bond acolytes will be eagerly watching for guidance from the ‘Central Bank Annual Symposium’ in Jackson Hole, Wyoming, hosted by FED Chairman Jay Powell, as to the direction of interest rates and the timing which of course will be crucial. Undoubtedly, a high degree of volatility could prevail for the next few weeks.
The only modest cumuli-nimbus cloud on the US Business climate horizon has been the performance of “Start-ups”, often a strong barometer of economic activity. The failures of “Start-ups” have risen by 60% in the past two years, flagged up by the FT, as founders face hangover from boom years.
Private company shutdowns jumped compared with last year, despite AI funding frenzy, threatening millions of jobs at VC-backed firms.
In closing, a word on the UK banking sector and a comment on the Labour Government’s plans for growth and business. Since the beginning of the year bank shares have seen huge gains – NatWest +57%, Barclays+47%, Lloyds Banking +21.5% and HSBC +4%.
Even Metro Bank has made an astonishing recovery. In the case of NatWest, having been into the taxpayer for 85% of its equity, the figure has been reduced to 19.97%.
Having done so well in hanging on to its taxpayers’ holding, the Chancellor obviously sees little point in off-loading the rest of its stake to retail investors. The recovery investors have waited fifteen years, which has been aided and abetted by inflation and higher rates, and has been meteoric.
NatWest, Barclays and Lloyds have also shaken off some personal scandals and injudicious decisions well, resulting in this sector being the best performing in the FTSE 100 by some distance.
I hope that Chancellor Reeves desists from talking down the UK’s economy.
She and Labour always were going to have huge fiscal problems to deal with and that taxation would inevitably have to go up.
This is not the worst economy any government inherited since the war. It is imperative that the Chancellor does not impose increased taxation on businesses or cut investment incentives.
We still desperately need inward investment. So, I implore her not to “throw the baby out with the bath water!”
