Market concern was raised about the Fed's decision to keep rates at a 23-year high at the recent meeting following the weak non-farm payroll report for July. Now, the discussion focus of some in the investment community has shifted from the timing of interest rate cuts to the timing of the United States' economic recession. In terms of economic data, some economists and stock strategists believe that although the risk of a recession has increased due to weak economic data, the recent market behavior has been overreacting. Apollo Global Management's Chief Economist, Torsten Slok, said in a Tuesday interview that the market is 'overly optimistic about cutting rates'. After the jobs report released last Friday, investors quickly adjusted their expectations for rate cuts in 2024 to over four times, more than the three times expected by the Fed after the July 31 meeting. Some market commentators even suggested that the Fed should cut rates before the September meeting. Slok added that given the recent volatility of market expectations for Fed rate cuts in the past few trading days, investors should adopt a 'cautious approach' to market predictions. Slok pointed out that data showed that consumer spending on activities such as air travel, dining out, and hotel lodging remained strong, indicating that there is no significant contraction of consumers at present. On the whole, there is not much evidence to suggest that the economy has entered or is heading towards a recession. The most worrying part of the July employment report was a rise in the unemployment rate to 4.3%, which triggered a closely watched recession indicator - the Sam rule. The report also showed that monthly job growth fell to the second lowest level since 2020 at 128,000. But Brett Ryan, Senior U.S. Economist at Deutsche Bank, believes that the report still indicates that the labor market is 'supported by a lack of layoffs rather than strong recruitment' and that the composition of the rise in unemployment is different from what is usually seen in the early stages of a recession. Ryan said that the rise in the unemployment rate is mainly due to an increase in labor supply, with more people entering the labor market for the first time or returning to work, rather than an increase in permanent layoffs. 'You should not overreact to one data point,' Ryan said. 'Undoubtedly, risks have increased, but as to whether the Fed will begin to cut rates more aggressively, we are not there yet.' For example, the recent weekly initial jobless claims reached the highest level in nearly a year. But Ryan noted that if the state of Texas, where workers were displaced by hurricanes, is excluded, the average number of initial unemployment claims over the past four weeks is actually declining. Michael Gapen, U.S. Economist at Bank of America, has a similar view and wrote in a report to clients that the reasons for an aggressive rate cut due to dynamic labor market conditions were weaker than expected by the market, without significant layoffs. 'A September rate cut is a done deal, but we believe the Fed does not need to make aggressive rate cuts resembling a recession,' Gapen wrote in a report to clients on Monday. Some strategists believe that the market's strong reaction to this data presents an opportunity to take more aggressive action in the stock market. Jean Boivin, Head of Investment Research at BlackRock, wrote in a report to clients on Monday that they believe recession concerns 'have been exaggerated.' 'We believe that as recession concerns recede and arbitrage trading rapidly reverses and stabilizes, risk assets will rebound,' the BlackRock team wrote. 'We maintain our shareholding in U.S. stocks, mainly driven by the power of artificial intelligence, and believe that selling provides buying opportunities.' Principal Asset Management's Chief Global Strategist, Seema Shah, also agrees with this view and said in a Tuesday interview that the market rebound shows that 'you're seeing a bit of a check, perhaps economic concerns aren't as severe as expected.' Shah added that in this market environment, the key issue investors need to focus on is whether the macro narrative has completely changed. Currently, she believes that the situation is still the same as before. She said, 'We expect the U.S. economy to slow, but we don't expect a recession. We expect the Fed to cut rates, but we also expect the Fed not to be forced to cut rates significantly. So, from this perspective, our fundamentals haven't really changed.'

However, many economists and stock strategists believe that although weak economic data increases the risk of a recession, the recent market behavior may be overreacting.

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After the non-farm payroll report was released last Friday, investors quickly adjusted their expectation for rate cuts in 2024 to over four times, higher than the Fed's expected three times after the July 31 meeting.

Slok added that given the recent volatility of market expectations for Fed rate cuts in the past few trading days, investors should adopt a 'cautious approach' to market predictions.

Slok pointed out that data showed that consumer spending on activities such as air travel, dining out, and hotel lodging remained strong, indicating that there is no significant contraction of consumers at present. On the whole, there is not much evidence to suggest that the economy has entered or is heading towards a recession.

The most worrying part of the July employment report was a rise in the unemployment rate to 4.3%, which triggered a closely watched recession indicator - the Sam rule. The report also showed that monthly job growth fell to the second lowest level since 2020 at 128,000.

But Brett Ryan, Senior U.S. Economist at Deutsche Bank, believes that the report still indicates that the labor market is 'supported by a lack of layoffs rather than strong recruitment' and that the composition of the rise in unemployment is different from what is usually seen in the early stages of a recession.

Ryan said that the rise in the unemployment rate is mainly due to an increase in labor supply, with more people entering the labor market for the first time or returning to work, rather than an increase in permanent layoffs.

Ryan said, 'You should not overreact to one data point. Undoubtedly, risks have increased, but as to whether the Fed will begin to cut rates more aggressively, we are not there yet.'

For example, the recent weekly initial jobless claims reached the highest level in nearly a year. But Ryan noted that if the state of Texas, where workers were displaced by hurricanes, is excluded, the average number of initial unemployment claims over the past four weeks is actually declining.

Michael Gapen, U.S. Economist at Bank of America, has a similar view and wrote in a report to clients that the reasons for an aggressive rate cut due to dynamic labor market conditions were weaker than expected by the market, without significant layoffs.

'A September rate cut is a done deal, but we believe the Fed does not need to make aggressive rate cuts resembling a recession,' Gapen wrote in a report to clients on Monday.

Will Risk Assets Rebound?

Some strategists believe that the market's strong reaction to this data presents an opportunity for more aggressive action in the stock market.

Jean Boivin, Head of Investment Research at BlackRock, wrote in a report to clients on Monday that they believe recession concerns 'have been exaggerated.'

'We believe that as recession concerns recede and arbitrage trading rapidly reverses and stabilizes, risk assets will rebound,' the BlackRock team wrote. 'We maintain our shareholding in U.S. stocks, mainly driven by the power of artificial intelligence, and believe that selling provides buying opportunities.'

Principal Asset Management's Chief Global Strategist, Seema Shah, also agrees with this view and said in a Tuesday interview that the market rebound shows that 'you're seeing a bit of a check, perhaps economic concerns aren't as severe as expected.'

In this market environment, Shah added that investors need to focus on whether the macro narrative has completely changed. Currently, she believes that the situation is still the same as before.

'We expect the U.S. economy to slow, but we don't expect a recession. We expect the Fed to cut rates, but we also expect the Fed not to be forced to cut rates significantly. So, from this perspective, our fundamentals haven't really changed.'

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