Recession Risks Rise, But Analysts Say It Might Be Overstated
Due to the July non-farm report significantly underperforming expectations, Wall Street's focus has shifted from interest rate cuts to the timing of the U.S. economy falling into a recession. Despite this, some analysts still believe that although the risk of a recession has increased, the market seems to be overreacting.
Torsten Sløk, Chief Economist at Apollo Global Management, said in an interview with the media on Tuesday that the market is pricing in too many cuts.
After the release of the non-farm employment report on Friday, expectations for four interest rate cuts within the year have sharply increased, with some analysts even suggesting that the Federal Reserve should urgently cut interest rates before the September meeting. However, Sløk believes that given the violent fluctuations in the market's bets on the Federal Reserve's interest rate cuts in the past few trading days, investors should be skeptical of the market pricing.
Sløk also pointed out that the data shows that consumers are still spending money on air travel, dining out, and hotel stays, indicating that there is no sign of a reduction in consumer spending at present.
Across the board, there is just not much evidence of the economy either being in a recession or being on its road to entering a recession, Sløk said.
In the July non-farm employment report, the most disturbing part is the unemployment rate - rising to 4.3% and triggering the famous recession indicator, the Sam Rule. The report also shows that the number of new jobs in July set the second-lowest record since 2020.
Brett Ryan, Senior U.S. Economist at Deutsche Bank, believes that although the labor market is not seeing strong recruitment, the layoffs have not continued to worsen, suggesting that the economy may not be heading towards a recession.
Ryan believes that the rise in the unemployment rate is largely due to an increase in the labor supply - either entering the labor market for the first time or just returning to work - rather than an increase in the number of layoffs.
The number of initial jobless claims for the week of July 27 recently hit the highest record in nearly a year, but Ryan pointed out that if Texas (where Hurricane Bill caused floods and workers were displaced) is excluded, the four-week average of initial jobless claims is actually declining.
Michael Gapen, an American economist at Bank of America, also holds a similar position. He wrote in a recent customer report that without large-scale layoffs, the reason for a large-scale emergency interest rate cut is weaker than the market pricing, and the labor market may be stronger than the market thinks.
David Solomon, CEO of Goldman Sachs, previously stated that the U.S. stock market correction is healthy, and the U.S. economy does not have a recession risk, and he expects the Federal Reserve will not urgently cut interest rates.
Solomon expects the Federal Reserve to cut interest rates once or twice in the fall. He also said that as the market readjusts to new economic data and revises expectations for Federal Reserve policy, market volatility will continue for a period.
In addition, some strategists also see this sharp correction in the U.S. stock market as an opportunity to pick up the bottom.
The BlackRock Investment Institute led by Jean Boivin believes that as concerns about economic recession ease and arbitrage trading quickly stabilizes, risk assets can recover. Driven by artificial intelligence, they believe that the sell-off has brought buying opportunities.
The team said that the market's concerns about economic recession are exaggerated.
Seema Shah, Chief Global Strategist at Principal Asset Management, agrees with this, pointing out in an interview with the media that Tuesday's market rebound now sees a bit of a reality check, that is, economic concerns may not be as bad as expected.
Shah added that for investors, the key to the current market situation is whether the macro environment has changed completely. For now, she believes that the situation has basically remained the same.