Invesco: Market overly concerned about the US economy falling into recession, Fed rate cut in September almost a certainty

According to the latest information from Smart Finance App, Kristina Hooper, Chief Global Market Strategist at JPMorgan, pointed out that the market is overly concerned about the US economy falling into a recession. Although the Federal Reserve's decision not to cut interest rates in July did increase the risk of an economic downturn, the labor market remains relatively strong. It is almost certain that the Federal Reserve will cut interest rates in September, and is likely to do so again in November and December. Currently, the global interest rate estimation system estimates a 75% probability of a 50 basis point rate cut in September.

Kristina Hooper stated that in July, the US non-farm payrolls added 114,000 jobs, far below the expected 175,000. The job additions for the previous two months were revised downward by 29,000. The unemployment rate rose significantly from 4.1% to 4.3%. The market is concerned that the Federal Reserve is taking too long to start cutting rates, leading to policy mistakes. Bond yields have dropped significantly, and the market is beginning to anticipate a 50 basis point rate cut by the Federal Reserve in September.

Due to the lower-than-trend economic growth and continued slowdown, JPMorgan's strategic indicators have shifted towards defensive positions. However, the market is overly concerned about the US economy falling into a recession. Although the Federal Reserve's decision not to cut interest rates in July did increase the risk of an economic downturn, the labor market remains relatively strong. It is almost certain that the Federal Reserve will cut interest rates in September, and is likely to do so again in November and December. Currently, the global interest rate estimation system estimates a 75% probability of a 50 basis point rate cut in September.

JPMorgan's baseline scenario is that it is not too late for the Federal Reserve to start cutting rates now. If the Federal Reserve starts easing monetary policy in September, the US is likely to avoid an economic recession. US economic growth may accelerate again by the end of 2024 or early 2025.

Considering the shift towards a conservative stance in the short term, JPMorgan will remain cautious in the short term. However, JPMorgan's medium-term outlook is driven by policy responses, normalization of the bond yield curve, and the resilience of the US economy. Therefore, in the long run, as in the past, a loose monetary policy cycle should be unrelated to economic downturns and tends to favor risk assets.

Kristina Hooper pointed out that the recent sharp decline in the Nikkei Stock Average seems to be due to various factors. The appreciation of the yen is certainly one of them, as the Bank of Japan has signaled a tightening of monetary policy. With the central bank believing that the possibility of long-term inflation staying at 2% is increasing, and holding a more optimistic view of future economic activity in Japan, there may be more rate hikes within the year. Some closing trades or profit-taking are still ongoing. The Bank of Japan's rate hike is a key event, and many expect the yen to further appreciate. In some past years, over half of the total sales of large Japanese stocks were settled in US dollars or other foreign currencies. Therefore, investors' concerns are not unfounded.

It is worth mentioning that Japanese bank stocks and financial stocks have fallen sharply. Normally, a rate hike by the Bank of Japan would benefit related industries (net interest margins improve). Japanese bank stocks have risen by over 40% this year (before the recent sharp decline), and many have prepared for the actions of the Bank of Japan. This may also be a market concern that if interest rates rise too quickly, their holdings of financial corporate bonds will face book losses Kristina Hooper believes that the recent pullback in Japanese stocks may be a healthy breather after a period of investment frenzy. Considering that the Japanese economy still has long-term structural advantages, the selling pressure is only temporary. The rapid growth in Japanese wages far exceeds recent historical levels, driving domestic demand growth.

As for the Japanese yen, with the possibility of multiple rate cuts by the Federal Reserve before the end of 2024, the yen against the US dollar may continue to appreciate. Looking ahead, the future trend of the US dollar against the Japanese yen may depend more on the Federal Reserve's monetary path rather than Japan's policymakers' gradual actions. The historical correlation between the USD/JPY exchange rate and the TOPIX index has been quite high. However, it is not advisable to withdraw from the Japanese stock market or take overly tactical actions on the yen, as this may miss out on potential structural advantages in Japan in the coming years