Global Macro Monitor

“The economy, stupid” is a phrase that was coined by Jim Carville in 1992. It is often quoted from a televised quip by Carville as “It’s the economy, stupid.” Carville was a strategist in Bill Clinton‘s successful 1992 U.S. presidential election against incumbent George H. W. Bush. – Wikipedia

The current assertion that the economy is in or heading toward recession and the Federal Reserve must execute an emergency rate cut, amplified by the former president’s alarming “GREAT DEPRESSION OF 2024” warning, warrants a closer examination. By the way, the former president is in rare company as stocks experienced two bear markets (a 20% decline) during his single term, and he persistently pressured the Fed to reduce rates to stabilize stocks during the Christmas bear market of 2018.

Technical Not Fundamental

From our perspective, the current market downturn is predominantly technical and does not indicate an imminent recession, although it is inevitable that a recession will occur – someday. Once again, financial pundits are retrofitting fundamentals to explain the stock market’s price movements.

The employment report released last Friday, which contained some positive aspects, served as a pretext for selling in an overheated market that had surged 38% since the end of last October and over 62% in less than two years. The unwinding of leverage and crowded trades, including the yen carry trade (often exaggerated), is contributing to this correction.

We posted last Thursday night that the S&P 500 was vulnerable, positioned right at support, and that a breach of 5,400 would likely lead to a move down to 5,100. Today’s low on the S&P 500 was 5,119.26.

Employment Report Insights

The employment report from last Friday was not as dire as many perceive. The Bureau of Labor Statistics (BLS) reported the economy created 114,000 payroll jobs according to the establishment survey and 67,000 jobs based on the household survey. For those interested in the methodological differences between these surveys, further details are available here.

Both measures indicated net job gains, albeit modest compared to recent years, and the rise in the unemployment rate can be attributed solely to an increase in the labor force. An expanding labor force, coupled with productivity gains, not only drives economic expansion but also helps mitigate inflationary pressures that have challenged policymakers in recent years.  Moreover, the employment report showed the size of  the U.S. labor force hit an all-time high in July. That’s unambiguously positive. 

The market has been smacked with a dose of reality over the past few weeks and may need more time to shed its excessive froth. It is crucial for investors and policymakers to maintain a level-headed perspective during these periods of volatility.

The S&P500 closed today at a key support level, right on its upward trend line and just a few points under its 50-day moving average. The S&P is up 14.2 percent for the year. Critical support is 5390-5400, which, if it breaks, makes a 10 percent correction down to 5100 increasingly likely.  That said, forecasting short-term moves in the stock market is a mug’s game.  We just can’t help ourselves. 

The Chicago Fed’s National Financial Conditions Index (NFCI) is significantly easier than when the Fed started the tightening cycle in March 2022 (see the chart below).  As the market ramps up based on the expectation of a September rate, financial conditions are set to ease even further.  In our opinion, there is far from a zero probability that the Fed will be forced to backpedal.  Markets also create “liquidity,” which can stimulate demand.  

Here’s a synopsis of today’s FOMC meeting:

Federal Reserve Chair Jerome Powell signaled that an interest rate cut may be coming at the September FOMC meeting, following the Fed’s decision to maintain its benchmark rate at 5.25%-5.5%, the highest in over two decades. Powell emphasized the Fed’s dependence on data and economic outlook when making this decision. Adjustments in the Fed’s language now reflect the FOMC’s attention to risks on both sides of its dual mandate: inflation and employment. The Fed acknowledged progress towards its 2% inflation goal, a moderated labor market, and easing inflation, yet stressed the need for “greater confidence” in inflation trends before reducing rates. Treasury yields dropped, and the S&P 500 gained, reflecting investor anticipation of a rate cut. Powell noted varying potential scenarios for rate cuts based on economic developments, underscoring a balanced approach to managing employment and inflation risks. The Fed’s shift in focus highlights the need to foster maximum employment alongside price stability.

The NFCI is constructed to have an average value of zero and a standard deviation of one over a sample period extending back to 1971. Positive values of the NFCI have been historically associated with tighter-than-average financial conditions, while negative values have been historically associated with looser-than-average financial conditions. – Chicago Fed

“We can no longer invest in the old, fossil-fuel technology and we don’t yet know in which new technology to invest.” – Martin Gorning, GIER

• Germany’s inability to generate meaningful growth is casting a shadow over the long-term prospects for the economy 
• A country long seen as Europe’s motor of expansion is increasingly looking like a deadweight
• Of the 10 quarterly GDP readings since Scholz took office, more than half showed either nearly no growth or a contraction
• At the heart of Germany’s weakness is the manufacturing base that sustained export-led growth for much of this century
• The end of cheap gas imports from Russia was a body blow that companies are still struggling to get past, especially in energy-intensive industries
• Germany’s car manufacturers, a central pillar of the economy’s past success, are also trying to make up for lost ground as they confront China’s head start in production of electric vehicles 
• Only 12% of Germany’s newly registered vehicles are electric — last year it was more than 20%
• The roots of the economy’s struggles go beyond cyclical volatility — half of an estimated 7% shortfall in industrial activity is structural
• Germany is struggling with a shrinking workforce, bureaucracy and an uncertainty over the political direction for decarbonizing the economy
• The self-imposed restrictions on government borrowing due to the so-called debt brake means there’s little leeway for public spending to address the country’s long-term economic problems – Bloomberg