In today’s briefing:
- Positioning Watch: Are we back to square one?
- Are We There Yet? What Next for Japanese Assets?
- US Inflation Watch: Disinflation scare or relief?
- China Over-Capacity––– Shifting from Heavy to Light Industries
- VAR Shock Pains Pass
- Labor Watch: What if the Sahm Rule wasn’t even triggered? A contrarian labour market view..
- CX Daily: New Rules Set to Give State-Owned Carmakers an EV Boost
- Market Expectation on US Rate Cuts Balloons: Reversal to QE?
- Is the US Labor Market Signaling a Recession?
Positioning Watch: Are we back to square one?
- Welcome back to the weekly positioning watch.
- What a week it has been so far! The recession narrative has slowly but surely vanished from global markets, leaving the events of this Monday a clear outlier and more a question of positioning rather than anything else.
- However, there are still debates about the true causes behind the sell-off, with the position squaring in USDJPY currently dominating the headlines as the main cause.
Are We There Yet? What Next for Japanese Assets?
- The first Act of this drama has played out in a very short time frame
- The trend has likely changed for the JPY and it won’t be back to business as usual for the carry trade
- This should benefit both real incomes and consumption in Japan
US Inflation Watch: Disinflation scare or relief?
- Welcome to our US Inflation Watch.
- We see US CPI inflation coming in at 2.8% YoY and 0.1% MoM, with core inflation at firm 3.1% YoY and 4 bps hotter than headline on the month.
- This is clearly below the early consensus, even if a few contributors dare to forecast even lower inflation levels than us.
China Over-Capacity––– Shifting from Heavy to Light Industries
- Over capacity problem has plagued China’s heavy industry in the past years, especially in aluminium, steel, car, and construction.
- On the other hand, consumption upgrade has been a recent policy direction of the Central Government. Overcapacity problem will start to emerge in lower-end manufacturing products.
- As the economy produces and consumes higher-end goods, the supplies of heavy industries that end up with buildings and cars may get satisfied.
VAR Shock Pains Pass
- Volatility spiked on 5 August, feeding dysfunctional dynamics. Risk assets have suffered but would be near their lows and soon recover their highs under historical examples.
- Equity prices also fell into the Fed’s first rate cut in 1998 before the tech bubble was blown. The equivalent potential for easing to prove premature is undiminished.
- There is no need for an emergency cut, and September’s monetary policy decisions should depend on the recession risk in macro data rather than on recent equity moves.
Labor Watch: What if the Sahm Rule wasn’t even triggered? A contrarian labour market view..
- Take aways: Prime age unemployment looks to green light a rate cut. ISM service employment surprising to the upside. The Fed will take a decision in September based on hurricane-impacted numbers.
- The Sahm rule would not have been triggered if it wansn’t for labor force entries and temporary weather related lay-offs.
- The job market is doing much better than feared by many and the Fed Funds pricing is overcooking the easing cycle.
CX Daily: New Rules Set to Give State-Owned Carmakers an EV Boost
- Autos / In Depth: New rules set to give state-owned carmakers an EV boost
- Corruption /: Former Shenzhen mayor gets life sentence for taking $15 million bribes
- Huawei /: Huawei unveils first luxury sedan model under partnership with BAIC
Market Expectation on US Rate Cuts Balloons: Reversal to QE?
- Majority of the market now believes Fed is going to lower rate by 100bps to 125bps by end of this year and by 50bps in September.
- Coupled with the most recent weak job reports and stock market revision, current market environment call for possibility of reversal to QE.
- However, we stick to our forecast of only one 25bps rate cut in September, as inflation is still a concern and the Fed would not want to revert to QE.
Is the US Labor Market Signaling a Recession?
- Arguably, the state of the US labor market is key to any recession call
- Despite the ongoing rise in the unemployment rate, other labor market dynamics might be at play
- One simple approach is to use the claims gap along with the unemployment rate to assess whether labor market conditions are deteriorating
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