In today’s briefing:
- Data Dependent Fed Unfazed by Fallout from Unwinding Carry Trades
- Assessing the Damage: It’s Not Just the Carry Trade
- What Will Lead the Anticipated Market Rebound?
- Central Bank of Turkey Keeps Its End-Year Inflation Forecast Unchanged at 38%
- China: CPI Still Weak for July and Forecast of Upcoming Government Measures
- Reserve Bank of India Faces Critical Decision
Data Dependent Fed Unfazed by Fallout from Unwinding Carry Trades
- Financial markets took fright from the weaker than expected July Employment Situation report. Fed policy remains data-dependent and the Fed will wait for more data to formulate an appropriate response.
- BoJ policy has seemingly broken the attraction of the yen carry trade, beneficial for US equities in 2024. Financial market volatility has forced the BoJ to postpone policy rate increases.
- The case for an emergency Fed policy rate cut remains unconvincing, particularly when current circumstances are compared to other instances of inter-meeting policy rate reductions back in 2020 and 2001.
Assessing the Damage: It’s Not Just the Carry Trade
- The recent disorderly risk-off episode can be attributed to the unwind of a series of trades that depend on a low-volatility and complacent environment.
- Historically, such unwinds have resolved in volatility spikes and higher equity returns soon afterwards
- The current environment is supportive of a quick market recovery, though the risk of a LTCM-style blowup could see a longer and more complex market bottom.
What Will Lead the Anticipated Market Rebound?
- Numerous historical studies of volatility spikes indicate that the stock market is poised for renewed strength.
- A review of market leadership shows weakness by technology and other large-cap growth stocks.
- We believe the rotation from growth to value and from large caps to small caps will continue and these stocks will be the new leadership in the next leg up.
Central Bank of Turkey Keeps Its End-Year Inflation Forecast Unchanged at 38%
- Central Bank of Turkiye (CBRT) released its third quarterly inflation report of the year on August 8, and did not change its inflation forecasts and policy guidance.
- CBRT projects that inflation will fall to 38% at end-2024, and kept its forecasts for 2025 and 2026 unchanged at 14% and 9%, respectively, emphasizing the disinflation process has started.
- We envisage CPI to cool off to 50%’s in August on base effects coupled with tightened monetary and fiscal policies, additional macro prudential measures, and relative
China: CPI Still Weak for July and Forecast of Upcoming Government Measures
- July CPI up 0.5% y/y vs June +0.2%, PPI -0.8% y/y vs June -0.8%.
- CPI uptick comes as Beijing boosts support for weak consumer sector, but core CPI still weaker than previous month.
- Overall data outcome such as weak CPI, strain on exports, and soft domestic demand backs expectations for more stimulus.
Reserve Bank of India Faces Critical Decision
- The calls for a rate cut are rising in the Indian market, but this is unlikely to impact the RBI’s upcoming decision.
- The RBI will retain its stance of withdrawal of accomodation and maintain benchmark rate of 6.5% in its August meeting, staying on the path of inflation target.
- Concerns around high borrowing costs are rising, which could change the RBI’s stance.
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