Monday is seeing lots of red on the screens of stock traders from London to Frankfurt, from Tokyo to Seoul. Japan's stricter monetary policy and pricey AI stocks are playing a part, but the markets are most worried about a US recession. Investors, though, are probably going to be let down if they were expecting Federal Reserve Chair Jay Powell to help by drastically cutting rates.
The stock market's hopes for an economic "soft landing" have been rudely dashed. Rather than a perfect scenario where inflation returns to a reasonable 2% and both the US and global economies escape downturns, key stock indices are increasingly indicating that a longer boom may have a messier ending.
The Nikkei 225 index in Japan saw its largest percentage decline in a single day since October 1987 on Monday, plunging over 13%. Within the first three trading days of August, the European benchmark Stoxx 600 index has dropped 6%, while the FTSE 100 index has decreased by 4% within the same time frame. The tech-heavy Nasdaq Composite index in the US has already fallen 10% from its peak reached on July 10. Furthermore, futures markets indicate that the debacle might go on when US trading starts.
The depressing outlook was exacerbated by the Bank of Japan's decision to raise interest rates and the disappointing results of companies like Microsoft, Alphabet, and Intel, along with their AI-inflated valuations. It didn't help that renowned investor Warren Buffett had cut his ownership stake in Apple in half over the weekend.
However, a US recession is the biggest threat. It would come as a shock. In July, a study conducted by Bank of America revealed that around 70% of global investment managers anticipated a soft landing. However, some worrying signs indicate that the economy is faltering: unemployment increased to 4.3%. In July, nearly reaching a three-year high. According to the "Sahm rule," a gauge of how quickly unemployment is rising created by former Fed economist Claudia Sahm, hiring is dropping to levels that historically have signaled recessions. Concerns about a vulnerable American customer have been compounded by poor results from companies that produce Oreos, including Mondelez, and other large consumer goods companies.
Traders want Powell to save their bacon. They have increased their wagers since Friday, believing that US rates will fall from their present range of 5.25% to 5.50%. According to LSEG's compilation of futures prices, they now project three straight reductions totaling 125 basis points by December.
It would be unprecedented to see a succession of cuts so swiftly outside of a severe financial crisis or recession. However, the Atlanta Federal Reserve's most recent assessment indicates that the US economy is still expanding at a 2.5% annual rate. Even though it's slowly rising, unemployment is still historically low and less than half the rate during the recession in 2009. Finally, inflation is still higher than the 2% target set by the Federal Reserve. Powell might be prompted to start cutting rates by the deteriorating environment. However, it would be unwise for him to pay attention to the markets' insistent plea for immediate stimulus