Source: Snow Tao Macro Notes
Authors: Song Xuetao, Zhong Tian
Compared to the previous two soft landing cycles, the US economy will enter this round of interest rate cuts with the highest level of pre-cutting momentum. From a broader perspective, there is no significant economic slowdown as a "trigger condition", so the recession concerns based on the rise in unemployment lack support. This also demonstrates that the Fed's interest rate cuts may trigger further inflation, which may not be so far away.
Faced with the unexpected US core CPI in August, the market's volatility is far less than the sharp movements earlier in the year, and the expected interest rate cuts for the year are still at the 100 basis point level after the data release.
After Powell's dovish turn in August, the market is not concerned about the reasons and consequences of the interest rate cuts, only speculating on the magnitude of the cuts. Therefore, the reaction to economic data is asymmetric: there is a stronger reaction to "hard landing" data, while it is difficult to adjust the interest rate expectations for "no landing" data. The reason may be that interest rate expectations do not solely come from the economic logic of the data itself.
The August US CPI may not change the decision to start the Fed's interest rate cuts in September, as the logic behind the Fed's actions is more likely political rather than economic. And more importantly, it means that the US still has the foundation for further inflation. If there are consecutive interest rate cuts, the US economy will experience re-inflation.
The US economy is stronger than previous soft landing cycles and even stronger than previous hard landing cycles.
This means that compared to the previous two soft landing cycles, the US economy will enter this round of interest rate cuts with the highest level of pre-cutting momentum. From a broader perspective, there is no significant economic slowdown as a "trigger condition", so the recession concerns based on the rise in unemployment lack support.
This also proves that a Fed rate cut may lead to further inflation, which may not be so far-fetched.
Risk warning: There is a significant deviation in the US unemployment rate data, US corporate profits are slowing down more than expected, unexpected events may occur during the US election, and there is increased uncertainty in US wage growth.
Editor/Jeffy