After concerns about "inflation" have eased, the risk of "stagnation" has also diminished.
On August 15th local time, the U.S. "terrifying data" of retail sales exceeded expectations, the number of initial jobless claims fell to the lowest level since early July, and Walmart's financial report was dazzling. A series of positive news swept away the previous recession gloom, and the possibility of the Federal Reserve cutting interest rates by 50 basis points in September further dissipated.
The market's plunge has also become a "thing of the past". The U.S. stock market has recouped all the losses from earlier in August, the S&P 500 index is quietly approaching a historical high, U.S. Treasury bonds are falling, yields are soaring, the U.S. dollar index is rising, and oil prices are increasing.
Wang Youxin, a senior researcher at the Bank of China Research Institute, told 21st Century Economic Report reporters that recent U.S. economic data has shown a clear divergence, leading to increased market disagreement on the U.S. economy. The July non-farm employment and ISM manufacturing PMI data were both significantly lower than expected, especially the unemployment rate triggering the recession conditions revealed by the Summation Law, which intensified market concerns about the U.S. economy heading into a recession and a "hard landing". After the non-farm data was announced, discussions about the Federal Reserve potentially cutting interest rates by 50 basis points in September heated up, leading to a rapid decline in U.S. Treasury yields. Coupled with the impact of the Bank of Japan's unexpected interest rate hike in July, the U.S.-Japan "carry trade" quickly reversed, causing a sharp short-term decline in major global stock markets, including the U.S. stock market, and a rise in financial market panic sentiment. However, the latest series of data has eased concerns about an economic recession, providing more confidence for a "soft landing" of the U.S. economy and improving the sentiment in global financial markets.
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In the future, it is necessary to be vigilant. Although market risk appetite has warmed up again, the current rise is not solid. Behind the seemingly dazzling economic data and financial reports, a series of risks are also looming.
Financial reports and economic data both perform well.
Amid mixed economic data leaving the market confused about the future, the big-box stores at the end of the supply chain may have a more personal experience of customers' consumption desires.
On August 15th, Walmart's financial report showed that in the 13 weeks ending July 26th, the company's total revenue was $169.3 billion, a year-on-year increase of 4.8%, with an expected revenue growth of 3.25% to 4.25% for the next quarter; adjusted earnings per share were $0.67, a year-on-year increase of 9.8%.
This is also the second time Walmart has raised its annual revenue and profit expectations this year. Despite inflation being higher than average for several years, consumer spending remains resilient, and Americans are flocking to Walmart stores to buy affordable necessities. On the 15th, Walmart's stock price once rose by more than 8% during the trading day, setting a record high.
Consumer resilience is also reflected in macroeconomic data. Data released by the U.S. Department of Commerce on the 15th showed that U.S. retail sales in July increased by 1% month-on-month, the highest level since February 2023, far higher than the expected 0.4%, and the June data was revised down from 0% to -0.2%. Except for sporting goods and bookstores, consumer spending on almost all products surged. Excluding automobiles, retail sales increased by 0.4%, exceeding the expected 0.1%, and the June data was revised up from 0.4% to 0.5%.Additionally, the number of initial jobless claims in the United States decreased by 7,000 to 227,000 last week, reaching a new low not seen in over a month. This indicates that the labor market still has resilience, and the possibility of the Federal Reserve cutting interest rates by 50 basis points next month has also diminished slightly.
Concerns about a U.S. economic recession have been temporarily alleviated. Wang Youxin analyzed that the growth in retail sales is a direct reflection of increased consumer spending and is also one of the important drivers of economic growth. Retail sales data that exceeded expectations indicate that U.S. consumer demand still has resilience. The number of initial jobless claims is an important indicator of the health of the labor market. Its drop to the lowest level since early July suggests that the U.S. job market has been relatively robust recently, with fewer layoffs by companies, reflecting the continuity of economic activity, which has alleviated market concerns about a recession to some extent.
This means that the Federal Reserve is more likely to cut interest rates moderately in September. Wang Youxin stated, "The cooling of the 'recession trade' will drive a short-term recovery in the financial market. With concerns about a U.S. economic recession eased, market expectations for the pace and magnitude of Federal Reserve rate cuts have been adjusted, reducing expectations for a 50 basis point cut in September and more inclined to believe that the Federal Reserve may first cut rates by 25 basis points. Although the expected magnitude of the Federal Reserve's rate cut has decreased, this adjustment is mainly based on a better scenario where the U.S. economy is more likely to achieve a 'soft landing,' leading to a rebound in investor risk appetite and pushing U.S. dollar assets to rebound from the previous significant correction. After the data was released in the evening of August 15, the U.S. dollar index once again rose above 103, U.S. Treasury yields rebounded significantly, and the three major stock indices also welcomed a rebound.
Echoing this, St. Louis Federal Reserve President Musalayem and Atlanta Federal Reserve President Bostic reversed their previous skeptical attitudes and are inclined to cut interest rates next month. Bostic stated that he is open to a rate cut in September and that the Federal Reserve can no longer be 'late' in easing monetary policy. Musalayem indicated that the time for the Federal Reserve to appropriately lower interest rates is approaching, as inflation has returned to the right track and is heading towards the 2% target level, and the labor market no longer poses a risk to inflation.
The economic headwinds that cannot be ignored are gradually emerging. Behind the impressive economic data, investors cannot overlook a series of hidden concerns. Despite retail sales recording the largest sequential increase in a year and a half, the U.S. Department of Commerce has revised the previous figures downward for eight consecutive months, and the view of a soft economic landing still requires more data support. U.S. retail sales in July increased by 1% month-on-month, far exceeding expectations, but this was mainly due to a rebound in automobile sales, which had been hit in June due to a widespread cyberattack on dealerships. Excluding automobiles and related parts, retail sales in July only grew by 0.4%.
At the same time, the industrial production data released on the 15th showed weakness, with a 0.6% month-on-month decline in industrial output in July. The Federal Reserve stated that the disruption caused by Hurricane 'Beryl' reduced the data by about 0.3 percentage points. However, even excluding this factor, the decline in July was worse than the expected -0.1%, and the data for June was also revised downward.
It is necessary to be vigilant as a series of weak signals are emerging. There has been a significant drop in U.S. automobile production, a decline in confidence among homebuilders, a plummet in the Philadelphia Federal Reserve's business outlook, the New York Federal Reserve's manufacturing survey has been in a state of contraction for nine consecutive months, and import and export price inflation is higher than expected. Economic headwinds require close attention.
Fangde Securities' Chief Analyst Zhang Chi told a 21st Century Economic Report reporter that U.S. economic data is indeed slowing down, but it is not a collapse-style decline; it is more of a gradual slowdown, and the probability of a hard landing for the U.S. economy is very low. In a high-interest-rate environment, the number of bankruptcies among small and medium-sized enterprises in the United States is gradually increasing, economic differentiation is severe, large corporations are generally still profitable, but middle and lower-income consumers are not as comfortable.Despite concerns about recession having eased, numerous signs indicate that the U.S. economy is still on a downward trajectory. Wang Youxin stated that in the short term, the decline in initial jobless claims and the growth in retail sales data have indeed brought positive signals to the market, improving market confidence. However, the trend of U.S. economic growth in the second half of the year still needs further observation, especially considering the recent mixed economic data performance. The decline in the U.S. consumer confidence index, the decrease in the capacity utilization rate of automobile manufacturers, the decline in confidence among homebuilders, the worsening business outlook, and the continuous contraction of the manufacturing PMI index all suggest a weakening of the U.S. economic growth momentum, reflecting the multiple challenges the U.S. economy is currently facing.
Moreover, Walmart's better-than-expected performance is seen as a signal of good consumer conditions, but this is because consumers, under economic pressure, have reduced their spending and chosen the more affordable Walmart. Walmart CEO Doug McMillon stated that Walmart's grocery sales account for more than half of its total sales, with prices about 25% lower than traditional supermarkets. The company has also temporarily reduced prices on 7,200 selected items, and the overall prices at Sam's Club are slightly lower than the same period last year.
Walmart's Chief Financial Officer, John David Rainey, stated that consumer activity has remained stable in the first half of this year, but uncertainties such as the U.S. general election later in the year and the turmoil in the Middle East may affect consumer sentiment. Walmart's members and customers remain very selective, smart, and value-oriented; they focus more on necessities rather than discretionary goods.
Market "Great Reversal" Hides Hidden Worries?
Despite the economic headwinds, the recession alarm has been largely lifted, and the capital market has also welcomed a "Great Reversal."
U.S. stocks have recouped all the losses from the "August scare." On August 15, the S&P 500 index closed up 1.61%, at 5,543.22 points, not far from the historical high of 5,669.67 points; the Nasdaq index rose by 2.34%, at 17,594.5 points; the Dow Jones Industrial Average increased by 1.39%, at 40,563.06 points. Previously soaring Treasury bonds have somewhat retreated, with the two-year U.S. Treasury yield, sensitive to interest rate policy, rising by 12.7 basis points to 4.097% at the end of the day on the 15th, and the 10-year U.S. Treasury yield increased by 7.2 basis points to 3.912%.
Zhang Chi indicated that previously, the U.S. ISM manufacturing PMI was lower than expected, non-farm employment was below expectations, the unemployment rate was higher than expected, and the CPI was slightly weaker than expected. The market极致定价the U.S. would enter a recession, driving a concentrated unwinding of yen carry trades, and the sentiment became quite bad. However, now, data such as the better-than-expected retail sales have led to a revision of the "recession trade," intensifying asset volatility.
On the one hand, the largest drawdown in the U.S. stock market since the COVID-19 pandemic has ended, and trend-following quantitative funds are now preparing to re-enter the market, potentially pushing U.S. stocks. For example, Barclays stated that last week's surge in the VIX triggered a massive sell-off by volatility control funds, with these funds' stock allocation dropping from 110% to about 50%. Now, as the volatility index returns to the level before the sell-off, it is expected that volatility control funds will re-establish these positions.
On the other hand, despite U.S. stocks approaching historical highs again, they still face risks under the uncertainty of future economic data and monetary policy. Zhang Chi analyzed that the market currently has a bias towards expecting rate cuts from the Federal Reserve, with three meetings left this year, and the market expects one of them to require a 50 basis point rate cut. However, looking back at the historical situations of 50 basis point rate cuts, the previous instances were the 2001 dot-com bubble, the 2008 financial crisis, and the pandemic in March 2020. Unless the situation deteriorates sharply, the Federal Reserve is almost unlikely to cut rates by 50 basis points at once. The probability of the Federal Reserve cutting rates by 25 basis points in all three remaining meetings this year is the highest, but there may be 1-2 additional cuts next year.
The great reversal in U.S. stocks hides hidden worries, and large investors are preparing for the possibility that the turmoil in the stock market this summer may continue into the fall. Michael Kelly, head of multi-asset at PineBridge Investments, has reduced the fund's stock holdings and may further withdraw funds from the stock market. Arun Sai, senior multi-asset strategist at Pictet Asset Management, also warned that volatility makes it difficult to increase risk exposure.On August 13, Bank of America noted in its monthly survey of global fund managers that as expectations for global economic growth fell to an eight-month low, investors in August increased their allocation to cash and reduced their overweight positions in stocks. Only 31% of respondents indicated that they had increased their holdings of stocks in August, down from 51% in July, while their average cash level stood at 4.3% of managed assets, higher than the 4.1% a month earlier.
Where will the stock, bond, and currency markets head next? Zhang Chi believes that the upward trend in U.S. stock market volatility is also influenced by seasonal factors, with volatility generally increasing before November each year, and this year coincides with the time when the U.S. elections are settled. As long as the U.S. economy does not experience a sharp downturn, it is difficult for the U.S. stock market to sustain a decline, and a balanced strategy may be better now, such as simultaneously investing in healthcare and technology. By mid-next year, the downward trend in interest rates is essentially certain, and the outlook for U.S. Treasuries is positive. The U.S. dollar may remain relatively strong; generally, it is difficult for the dollar to trend weaker before the Federal Reserve significantly eases monetary policy and the global economy recovers, as other countries may have a worse economic performance than the United States.
Looking ahead, Wang Youxin analyzed for reporters that the future trajectory of U.S. and global financial markets still highly depends on changes in key U.S. economic data and market judgments on U.S. economic recession. In different scenarios, if the U.S. economic growth moderates and market sentiment remains stable, the Federal Reserve will proceed with rate cuts in a more cautious manner, and the stock market is expected to rise further. However, if the U.S. economy deteriorates rapidly, market sentiment will turn pessimistic again, and the Federal Reserve will have to consider increasing the magnitude of rate cuts. The divergence in monetary policy between Japan and the U.S. will accelerate, and the reversal of "carry trade" will occur again. Changes in the direction of cross-border capital flows will have a significant impact on global financial markets. Therefore, it is essential to continuously monitor subsequent changes in U.S. economic data and adjust expectations dynamically.