The panic triggered by the latest US employment figures is gradually fading. At the start of the month, investors were concerned that stalling job creation and rising unemployment would inevitably lead to a slowdown in consumer spending, which accounts for two thirds of GDP and is therefore the bedrock of economic growth in the US.
Figures published last week showed that retail sales were particularly buoyant in July, up 1% month on month and 4% year on year. Almost every segment of the consumer goods basket has gained ground – from food and car sales to electronics and home furnishings. This uptrend was also reflected in the solid quarterly results recently published by leading retailer Walmart.
Fears that the world's largest economy might slide into recession seem to be subsiding. But early signs of a slowdown, particularly in the manufacturing sector, are still a good reason for the US Federal Reserve to start easing its monetary policy at its next meeting, on 18 September. With US inflation gradually nearing the Fed’s target, the US central bank is no longer compelled to keep interest rates at 5.5% – their highest level in over 20 years.
Fed Chair Jerome Powell is likely to take advantage of the annual Jackson Hole gathering of central bankers this weekend to outline this imminent change in course after more than two years of very restrictive monetary policy. US markets bounced back last week, buoyed by the resilience in consumer spending figures and prospects of upcoming rate cuts by the Fed.
Of course, there will be no shortage of political and economic news over the coming weeks that could lead to further volatility. But with the Fed set to cut rates and bond yields dropping sharply, the outlook is bright for stock markets in the short and medium term.
The Japanese market plummeted a record 12% on Monday, 5 August, its biggest decline since Black Monday in 1987. The index had already dropped more than 20% in the first three days of August, its steepest loss ever. The Topix has since rebounded by almost 20% in less than two weeks. So what’s behind all this volatility? The market has been hit not only by disappointing US employment figures but also by the unwinding of carry trades, in which investors borrow in yen in order to invest in higher-yielding assets. The Bank of Japan's decision to raise interest rates on 31 July – at a time when US rates were expected to be cut – brought losses for these investors, forcing them to sell off their assets. The market's recent rebound was driven by a further depreciation in the yen, supported by the BoJ’s more accommodative tone. This move, along with an adjustment in valuations, prompted an 8% rise in the Topix last week. While it’s still unclear what’s left of carry trades within the financial system, the yen has stopped gaining ground, so we’re unlikely to see another bout of volatility like that recorded at the start of this month.
US inflation dropped back below the 3% mark in July, its lowest level in more than three years. This means inflation should stop worrying investors in the months ahead.