The recent market turbulence has been causing anxiety among investors, with fears of a US recession prompting calls for aggressive rate cuts by the Fed. The market has already priced in some easing, but the question remains whether the data justifies these fears or if equities are simply correcting after a long period of gains.
Looking at the US surprise index, which tracks economic surprises, we see that while the index has been trending downwards, it remains in positive territory. This suggests that while data releases have been weaker recently, the US economy is not on the brink of collapse. Previous recessions in the US have been triggered by major one-off events, such as the COVID pandemic in 2020 and the subprime mortgage crisis in 2007. It remains to be seen if the current market volatility is a sign of a looming recession or just a correction.
The market seems to be trying to push the Fed into aggressive rate cuts, especially if there is another market crash. The Fed has a history of responding to such events with significant rate cuts, as seen in the aftermath of the COVID pandemic in 2020. While the Fed remains focused on maintaining price stability and full employment, it is also mindful of financial stability issues. The chances of a 50bps rate cut in September have dropped to around 50%, but this could change in the event of a major crisis.
In conclusion, the recent market reaction may be driven by a combination of recession fears and investors trying to influence the Fed’s decisions. While the Fed has so far resisted calls for aggressive rate cuts, another market crash could change the situation. Investors should stay vigilant and be prepared for potential changes in monetary policy in the coming months.
