MV Weekly Market Flash: Notes...
It’s been a minute, as they say. What to make of it all? Let’s start with that first bit of news to which we all woke up on Monday morning, namely a 12 percent drop in the Nikkei 225 benchmark index of Japanese stocks. That one-day plunge had those of us who were around and following markets in October 1987 reminiscing, and not necessarily in a good way. It’s worth noting that Monday’s percentage loss was twice the magnitude of the six percent drop in the Nikkei immediately following the earthquake in 2011 that produced a meltdown in the Fukushima nuclear plant. And for what – a small hike in interest rates by the Bank of Japan and a smaller than expected increase in US job gains?
About Those Jobs
So let’s talk about those jobs numbers last week. What seemed to cause the most uproar and consternation among the endless panels of red-faced, hyperventilating guests on financial media sites last Friday was the uptick in the unemployment rate to 4.3 percent. Pundits were falling over themselves to explain how the Sahm Rule (something they had probably Googled minutes before while biding time in the CNBC green room) put that 4.3 percent unemployment rate squarely in the crosshairs of an incipient recession.
But not all unemployment rate increases are driven by the same thing; specifically, some come about from the demand side (currently employed people losing their jobs) while others are supply side events (an increase in the number of labor force participants). As economist Jim Paulsen helpfully explained in a piece this week, the number of unemployed Americans has risen by about 1.04 million so far this year, but at the same time the labor force has grown by about 1.2 million. So it seems like more of a supply thing, i.e. the number of people looking for work outpacing the number of workers getting the pink slip. That is much less of a recipe for recessionary storm clouds on the visible horizon.
Oh, and part of the jump in initial unemployment claims, which was another closely-watched data point last week, was due to the recent effects of Hurricane Beryl in some significant job markets that lay in her path. This week’s new claims numbers came in better than expected, adding validation to the argument against this being a structural trend.
Has The Carry Trade Played Itself Out?
Back to Japan, and that crazy Monday in Tokyo. Those of you who read our special comment earlier this week will have received an explanation of the so-called “carry trade” in which investors borrow cheaply in yen to invest in higher-returning opportunities elsewhere. The Bank of Japan’s move last week sent the yen soaring more than 12 percent against the dollar, effectively wiping out the attractiveness of this very popular strategy among international institutional investors. Selling begat more selling, and there were serious concerns as to how much potentially was at stake as those caught like deer in the headlights over the BoJ’s rate hike unwound their positions.
We still do not have a definitive answer to that question, but we take it as a good sign that the rest of this week has dialed back the chaos seen on Monday. Market’s are still choppy and volatile, but we do not see obvious signs of the kinds of distress selling that would potentially result in more days of massive percentage losses among global asset classes. We will credit the Fed for playing a constructive role here in helping to calm nerves. After Monday’s carnage there were the usual frantic calls among market participants for “emergency” measures by the Fed, meaning a non-scheduled rate cut just days after the central bank held firm on its policy rate last week. Fed members correctly noted that it would take a great deal more than one report showing 114,000 payroll gains for the Federal Open Market Committee to conclude that a real emergency was clear and present. The so-called “Fed put” of prior periods, which is market shorthand for a Fed bailout in periods of temporary distress for asset prices, has been entirely absent from the Powell Fed’s monetary policy regime of the past two years, and we expect that it will remain dormant.
What’s Next?
Looking ahead, we expect the next significant piece of news the market will latch onto will come next Wednesday with the July Consumer Price Index (CPI) report. Economists expect to see a monthly increase of 0.2 percent in consumer prices (excluding the volatile categories of food and energy), which would translate to a year-on-year increase of 3.2 percent and a continuation in the right direction towards the 2.0 percent target rate. If the actual number comes in at or below that consensus forecast, it should be received as another positive indicator. Be prepared for some mayhem if it goes the other way, though. Also on tap at the end of next week will be the Michigan consumer sentiment report to give us an update on how US consumers are feeling about life in general these days. A week later comes the annual confab of global central bankers at Jackson Hole, Wyoming, which often serves as a platform for the Fed chair to give markets a specific taste of what he and his colleagues have in mind for near-term policy.
August, as we have often noted, can be a volatile month with customarily lighter than average trading volumes and thus the potential to exacerbate the reaction (positive or negative) to new developments. As always, we caution about letting emotions interfere with the patience and discipline required for adhering to long-term financial objectives. Part of this discipline involves being very careful about some of the promises offered by certain investment products that purport to over safe havens in times of distress. We will be talking about some of these in our commentaries in the weeks ahead.