Japan's Market Assault: US Economy on the Brink of Recession?

Introduction:

The US economy is slowing down, but talk of a recession is premature

Japan is the fuse for global economic fluctuations

The end of high interest rates suggests: market trends are unpredictable

Last week, the global capital market experienced unprecedented violent fluctuations. Due to significant price movements, many people became worried and speculated that the US economy and even the global economy might be heading towards a recession. Some even questioned whether the global financial market is brewing a bigger storm?

The US economy is slowing down, but talk of a recession is premature

Market sentiment fluctuations often have inertia, especially in the current complex and changeable global economic environment, where any small change can trigger a chain reaction.

We believe that the market fluctuations that began last week have three characteristics: first, they may last for a period of time; second, they are not simply a single downward trend; and third, technical adjustments may be the main cause.

In fact, after entering 2024, the global capital market has shown a relatively strong overall trend, especially the stock markets led by the US and Japan, which have shown a continuous upward trend. However, as time came to July and August, market fluctuations have significantly intensified.After thorough analysis, we believe that the root cause of recent market fluctuations may be more about technical corrections rather than fundamental changes.

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Despite concerns in the market about a global economic recession, analyzing the latest economic data, especially the economic situation in the United States, reveals that the situation is not as pessimistic as feared.

Indeed, the United States has recently seen unfavorable signals such as rising unemployment rates, declining retail prospects, weakened consumer spending power, and a manufacturing PMI below 50, with inflation and wage growth rates also significantly slowing down.

Against this backdrop, the market suddenly experienced a flash crash last week. We believe that these phenomena are largely an inevitable result of the Federal Reserve's tightening of monetary policy to suppress inflation.

In fact, it is not common to achieve strong economic growth while trying to suppress inflation, especially rare in the context of the past two years. During this period, the Federal Reserve adopted a policy of successive interest rate hikes and maintained interest rates at a relatively high level, with the main goal being to expect a moderate slowdown in economic activity.

The slowdown in economic activity usually means a weakening of consumer purchasing power, a decrease in labor market activity, and a decline in the inflation rate.

Furthermore, this also suggests that in the near future, as the economic situation changes, the United States may enter a rate-cutting cycle. This series of phenomena, as normal fluctuations in the economic cycle, are to be expected from a macroeconomic perspective and should not cause excessive concern.

It is worth noting that the latest announced U.S. second-quarter GDP growth rate far exceeded expectations, showing that the U.S. economy still has a certain level of resilience. Although the economy has slowed down, there are no immediate signs of recession. Cyclical fluctuations in the economy are normal phenomena, and the current market fluctuations are part of this cyclical fluctuation.

Japan is the trigger for global economic fluctuations.Some friends might ask, why has the market reacted so violently? Upon in-depth analysis, it is not difficult to find that the trigger for this turmoil may not entirely originate from the United States, but may be lurking in Japan.

Since the beginning of this year, the Japanese stock market has experienced an unusually rapid rise. At the same time, the yen exchange rate has continued to decline, showing a phenomenon of rapid currency devaluation that has not been seen for many years. However, despite the depreciation of the yen, the Japanese stock market has soared, and the unemployment rate has also significantly decreased, presenting a scene of economic prosperity.

Behind all this prosperity, it is actually the Bank of Japan's independent policy taken in the context of global inflation - stimulating economic growth by raising inflation and devaluing the local currency. However, the price will always come one day, just like any policy has its limits and end time, and the Bank of Japan's approach is no exception.

Recently, under tremendous pressure, the Bank of Japan finally announced an interest rate hike. This move immediately triggered a series of chain reactions in the market, especially those carry trade transactions (i.e., shorting yen and longing US dollars) based on the expectations of yen devaluation and US dollar appreciation.

With the announcement of the interest rate hike, these transactions quickly reversed, leading to a rapid appreciation of the yen, while the Japanese stock market suffered a heavy blow, with a single-day drop of more than ten percent. Even though the market has recovered somewhat, the Japanese stock market still suffered a heavy blow.

In last week's market crash, the Japanese stock market's decline led the world, a phenomenon closely related to Japan's unique financial environment.

At the same time, the decline in US economic data has also intensified market fluctuations, but this does not mean that the global economy or the US economy is about to enter a recession. We believe that this view is not yet sufficient and should be approached with caution.

Insight at the end of high interest rates: Market trends are unpredictable.

In fact, after a recent wave of increases, the valuation situation of the US stock market has attracted widespread attention from the market. From the latest data and US stock valuations, both the Nasdaq and the S&P 500 have valuations significantly higher than historical averages.

This phenomenon is particularly thought-provoking in the current context of relatively high interest rates, central banks' continued economic regulation, and future expectations of rising unemployment rates and slowing economic growth.High valuations often come with market instability. In the current environment, any minor disturbance can trigger significant corrections and volatility in the stock market. However, this does not mean that the end of the world is near. On the contrary, we should rationally view this phenomenon and recognize that market fluctuations are a normal part of the economic cycle.

At present, we are gradually approaching the end of a high-interest-rate environment. As the economy slows down, central banks still have sufficient policy tools to reignite sustained economic growth. As the market transitions from the current high-interest-rate state to a normal or low-interest-rate level, the trends in the stock market and financial markets will become more unpredictable.

However, it is important to note that this does not mean the market will collapse entirely, but rather it is entering a more complex and variable phase.

The current market volatility mainly reflects the following realities: First, high valuations need to be corrected. Second, the market may have underestimated the economic and consumer impacts of excessively high interest rates. Third, with the U.S. elections approaching, political uncertainty increases, and the market has not fully digested the risks brought by this factor.

Therefore, in the coming period, due to the already relatively high level of asset valuations, we expect the market to experience more intense ups and downs. This process may take three to six months, or even until the U.S. elections are settled, for the market to fully settle down.

During this period, we may see a market phenomenon with increased overall volatility but no single direction.

In response to the recent significant market fluctuations, combined with the latest economic data, and hot issues such as when the interest rate cut cycle will arrive, which the market is widely concerned about, the Australian Finance team has decided to conduct in-depth analysis and research on this series of issues within the next one to two weeks.

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