Recent market volatility has made headlines, but our Global Chief
Economist explains why the numbers aren’t as dire as they seem.
----- Transcript -----
Seth Carpenter: Welcome to Thoughts on the
Market. I'm Seth Carpenter, Morgan Stanley's Global Chief
Economist. Along with my colleagues, bringing you a variety of
perspectives, today I'll be talking about central banks, the Bank
of Japan, Federal Reserve, data and how it drove market
volatility.
It's Monday, August 12th at 10am in New York.
You know, if life were a Greek tragedy, we might call it
foreshadowing. But in reality, it was probably just an
unfortunate coincidence. The BOJ's website temporarily went down
when the policy announcement came out. As it turns out,
expectations for the BOJ and the Fed drove the market last week.
Going into the BOJ meeting consensus was for a September hike,
but July was clearly in play.
The market's initial reaction to the decision itself was
relatively calm; but in the press conference following the
decision, Governor Ueda surprised the markets by talking about
future hikes. Some hiking was already priced in, and Ueda san's
comments pushed the amount priced in up by another, call it 8
basis points, and it increased volatility.
In the aftermath of that market volatility, Deputy Governor
Yoshida shifted the narrative again, by stressing that the BOJ
was attuned to market conditions and that there was no
fundamental change in the BOJ's strategy. But this heightened
attention on the BOJ's hiking cycle was a critical backdrop for
the US non farm payrolls two days later.
The market knew the BOJ would hike, and knew the Fed would cut,
but Ueda san's tone and the downside surprise to payrolls ignited
two separate but related market risks: A US growth slowdown and
the yen carry trade.
The Fed's July meeting was the same day as the BOJ decision, and
Chair Powell guided markets to a September rate cut. Prior to
July, the FOMC was much more focused on inflation after the
upside surprises in the first quarter. But as inflation softened,
the dual mandate came into a finer balance. The shift in focus to
both growth and inflation was not missed by markets; and then
payrolls at about 114, 000 in July. Well, that was far from
disastrous; but because the print was a miss relative to
expectations on the heel of a shift in that focus, the market
reaction was outsized.
Our baseline view remains a soft landing in the United States;
and those details we discussed extensively in our monthly
periodical. Now, markets usually trade inflections, but with this
cycle, we have tried to stress that you have to look at not just
changes, but also the level of the economy. Q2 GDP was at 2.6 per
cent. Consumer spending grew at 2.3 per cent. And the three-month
average for payrolls was at 170, 000 -- even after the
disappointing July print.
Those are not terribly frightening numbers. The unemployment rate
at 4.3 per cent is still low for the United States. And 17 basis
points of that two-tenths rise last month; well, that was an
increase in labor force participation. That's hardly the stuff of
a failing labor market.
So, while these data are backward looking, they are far from
recessionary. Markets will always be forward looking, of course;
but the recent hard data cannot be ignored. We think the economy
is on its way to a soft landing, but the market is on alert for
any and all signs for more dramatic weakness.
The data just don't indicate any accelerated deterioration in the
economy, though. Our FX Strategy colleagues have long said
that Fed cuts and BOJ hikes would lead to yen appreciation. But
this recent move? It was rapid, to say the least. But if we think
about it, the pair really has only come into rough alignment with
the Morgan Stanley targets based on just interest rate
differentials alone.
We also want to stress the fundamentals here for the Bank of
Japan as well. We retain our view for cautious rate hikes by the
BOJ with the next one coming in January. That's not anything
dramatic because over the whole forecast that means that real
rates will stay negative all the way through the end of 2025.
These themes -- the deterioration in the US growth situation and
the appreciation of the yen -- they're not going away anytime
soon. We're entering a few weeks of sparse US data, though, where
second tier indicators like unemployment insurance claims, which
are subject to lots of seasonality, and retail sales data, which
tend to be volatile month to month and have had less correlation
recently with aggregate spending, well, they're going
to take center stage in the absence of other harder indicators.
The normalization of inflation and rates in Japan will probably
take years, not just months, to sort out. The pace of convergence
between the Fed and the BOJ? It's going to continue to ebb and
flow. But for now, and despite all the market volatility, we
retain our outlook for both economies and both central banks. We
see the economic fundamentals still in line with our baseline
views.
Thanks for listening. If you enjoy this show, please leave us a
review wherever you listen to podcasts and share Thoughts on the
Market with a friend or colleague today.
Kommentare (0)
Melde dich an, um einen Kommentar zu schreiben.