– Investors are reacting to news about ‘impending recession’ in the US and the Federal Reserve’s ‘overdue response,’ says analyst Grzegorz Drozdz
– Bank of Japan’s shift away from ‘long-standing zero interest rate policy’ is also a factor, Drozdz tells Anadolu
– Certain conditions could push the Fed to ‘consider a larger cut, not only in September, but also at subsequent meetings,’ says Martin Wurm, director at Moody’s Analytics
ISTANBUL
The turbulence in global stock markets is driven by mounting apprehension of a recession in the American economy and the US Federal Reserve’s delay in moving forward with an interest rate cut, according to experts.
Major stock exchanges in the US, Asia and Europe started bleeding on Friday and the trend continued when markets reopened on Monday.
These included the Dow Jones and tech-heavy Nasdaq, the Asia Dow, Tokyo’s Nikkei 225, STOXX Europe 600, UK’s FTSE 100 and others in Spain, Germany and Italy.
Grzegorz Drozdz, a market analyst at financial services firm Conotoxia, described the stock turmoil as a “a kind of flash crash” triggered by a situation “when several pieces of negative news overlap.”
“Investors are reacting to news related to the impending recession in the US and the Fed’s overdue response, as well as the Bank of Japan’s move away from its long-standing zero interest rate policy,” he told Anadolu.
Despite the Fed signaling last week that its first interest rate cut would come in September, investors are worried that the central bank has been too late to start loosening its monetary policy.
The Fed was expected to begin lowering interest rates in the first half of this year, but members of the Federal Open Market Committee (FOMC) have repeatedly said they need “greater confidence” that inflation is falling toward the 2% goal.
‘Fed risks choking off expansion’
Martin Wurm, a director at Moody’s Analytics, told Anadolu that their view is that “inflation and unemployment data warrant a cut by September.”
“We firmly believe that disinflation is on its last stretch and if the Fed keeps rates high for too long, it risks choking off the expansion,” he said.
The FOMC, he added, has not made a decision yet and “will do so based on the totality of data … by September.”
“If inflation were to resurge in the meantime, which we, however, consider unlikely, the Fed may further delay,” he said.
Wurm, on the other hand, noted that as the US labor market has softened, the Fed’s full employment mandate has also come back into focus, adding that “if unemployment were to rise more, the case for cutting rates will be stronger.”
‘Fed has made a mistake’
The American economy added 114,000 jobs in July, significantly below market estimates of 176,000 jobs, according to figures released last Friday.
Job additions for June were also revised down by 27,000, from 206,000 to 179,000.
The unemployment rate, meanwhile, increased to 4.3% in July from 4.1% in June, against market expectations that it would remain unchanged.
Commenting on the data, Mark Zandi, a chief economist at Moody’s Analytics, said in a post on X that the US job market “is beginning to sputter.”
He termed it a “clear message” that the Fed needs to act, stressing that “they should have begun cutting rates months ago.”
“The Fed has made a mistake in not cutting interest rates already, hopefully it isn’t an existential mistake … The question isn’t whether the Fed should cut in September, but by how much,” he wrote.
Japan’s rate hikes
Apart from the US Fed, the actions of the Bank of Japan (BoJ) have added fuel to the fire.
Back in March, the Japanese central bank increased its short-term interest rates to 0-0.1%, from minus 0.1%, marking the first rate hike in the country in 17 years.
In July, it raised the benchmark interest rate to 0.25%, its highest in 16 years, and unveiled plans to halve its monthly bond purchases to tighten its monetary policy.
“The BoJ’s action has significantly strengthened the yen in recent weeks, negatively affecting the profitability of Japanese exporters,” Drozdz explained.
Larger rate cut possible?
Many analysts have been expecting the Fed to cut rates by 25 basis points in September, but the probability of a larger one of 50 basis points is now becoming stronger.
The probability of a rate cut of 25 basis points has fallen to 15.5%, while it has gone up from 71.5% to 84.5% for 50 basis points, according to the FedWatch Tool provided by the Chicago Mercantile Exchange Group.
“The Fed has laid out a gradual pathway towards normalization in its projections, assuming that inflation keeps coming in, and underlying fundamentals remain resilient,” said Wurm.
“However, because monetary policy works with lags, the Fed will continue to keenly monitor the data to check if it has done too much. If economic activity were to slow more or if unemployment were to rise more, the Fed may consider a larger cut, not only in September, but also at subsequent meetings,” he added.
