Are concerns about a recession justified? Experts and market participants are on edge. However, the Federal Reserve remains tranquil while market anxiety persists.
Analysts conclude that the market’s negative response to the weak nonfarm payrolls for July has heightened fears that the US central bank may have been wrong to keep the funds rate at a 23-year high during its recent meeting.
Currently, investors are speculating about the timing of Fed rate cuts and the potential onset of a recession that could deal a blow to the US economy.
However, some economists consider a recession unlikely. They reckon the market overreacted to sluggish hiring in the US in July. According to Torsten Slok, Chief Economist at Apollo Global Management, the market is "pricing in too many rate cuts." Torsten Slok suggests that investors should view market predictions about Fed rate cuts and a recession with a pinch of salt. There is no compelling evidence that the US economy is heading into a recession, he added.
Earlier, analysts at BlackRock Investment Institute also claimed that fears of a US recession are overblown.
Following the US official employment report, investors quickly brought up the issue that the Federal Reserve might cut interest rates more than four times in 2024, up from previous expectations of three cuts. Some analysts said the Fed could lower interest rates even before its September meeting.
The most concerning part of the July nonfarm payrolls was the increase in the unemployment rate to 4.3%, which triggered panic in the market. According to the latest report, the monthly jobless rate in the US slowed to its lowest level since 2020.
However, Brett Ryan, an American economist at Deutsche Bank, advises maintaining calm. He believes that the US labor market is supported by a lack of layoffs rather than strong hiring. “The composition of the rise in unemployment differs from what is typically seen at the beginning of a recession. The current increase in the unemployment rate is largely due to an increase in the labor force supply, with individuals either entering the job market for the first time or returning to work. There’s no need to overreact to the current figures,” Ryan says.
This view is shared by economists at Bank of America. They believe that without mass layoffs, arguments for a drastic emergency rate cut by the Fed are not convincing. “A rate cut in September is almost half the battle, but the US economy probably doesn’t need a sharp monetary easing. Such a strategy could trigger a recession,” Bank of America sums up.
Some analysts also see the market’s sharp response to current macroeconomic data as an opportunity for more decisive actions in the stock market. According to Sima Shah, Chief Global Strategist at Principal Asset Management, the macroeconomic situation remains unchanged.
“The US economy is expected to slow down, but a recession is unlikely. The Federal Reserve will likely cut interest rates, but not aggressively. For now, everything is fine. The economic environment has changed little,” Sima Shah adds.
