The recession panic is gradually subsiding, and arbitrage trades have been squared. Inflation in the United States finally fell below 3% in August, while consumer confidence rebounded unexpectedly, and initial unemployment claims remained relatively stable. This has led more fund managers to deploy their portfolios based on the idea of a soft economic landing, with the risk asset market quickly adding leverage again. Global stock markets recorded their largest single-week gain in nine months last week. Yen borrowing to speculate on Japanese stocks has picked up again, with the Nikkei index rising by 7.9% last week. The chance of a large interest rate cut has decreased, leading to adjustments in U.S. Treasuries, with the yield on the 2-year note rebounding 21 basis points from its low, the VIX panic index sliding below 15, the U.S. dollar depreciating, and gold and silver strengthening. Democratic presidential candidate Kamala Harris took the lead over Republican Donald Trump for the first time in opinion polls and prioritized reducing living costs and improving economic security as the main tasks of governance; Japanese Prime Minister Kishida withdrew from the LDP presidential election, with various strongmen gearing up.
Last week's U.S. economic data pointed to a soft economic landing, confirming the author's consistent view and alleviating market anxiety about recession. The University of Michigan consumer confidence index rose to 67.8 in August (compared to the previous period's 66.4 and the median economist forecast of 66.9), marking the first rebound in consumer confidence in five months, which is particularly precious for the market and has significant reference value for monetary policy formulation.
Of course, overall consumer confidence is still constrained by high living costs, a cooling labor market, and heavy borrowing costs, but it appears that household demand remains strong and has a certain resilience to employment weakness. It is also necessary to see that consumers are increasingly turning to credit card overdrafts, relying on savings to maintain spending. Currently, consumer expectations for the labor market are relatively stable. Only 35% of respondents expect a significant increase in unemployment in the next year. This is exactly what the Fed wants to see - consumption slows down, but confidence does not collapse.
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At the same time, U.S. inflation in July continued to decline slowly. The CPI slowed down for the fifth consecutive month on a year-over-year basis and returned to the "2s" for the first time since the pandemic, slightly below market expectations; the core CPI rose by 3.2% year-on-year in July, the slowest growth rate since early 2021, in line with market expectations. If technical processing is done on the core CPI, and the three-month环比 is converted to an annual rate, excluding energy and food, the U.S. price level has already broken through the 2% policy target level.
From the perspective of controlling prices, although the PCE 12-month average, which the Fed uses as a benchmark, has not yet met the target, the trend of inflation towards the policy target is quite obvious, giving FOMC members enough "confidence" to start an interest rate reduction cycle in September. However, due to the very gradual decline in prices and the temporary absence of signs of a cliff-like economic decline, the Fed's interest rate reduction process will also proceed in an orderly manner. "Fed mouthpiece" reporter Nick Timiraos wrote that the latest CPI data has cleared the way for the Fed to cut interest rates at the September meeting.
From the pricing of the interest rate futures market, traders believe that the probability of a one-code interest rate cut in September is 100%, and the probability of a two-code interest rate cut is 34%. By the end of March next year, the implied interest rate has decreased by 146 basis points, which means that in the next five FOMC meetings, the FedFund rate will decrease by an average of 29 basis points each time. The panic-style large interest rate cut that the market once hoped for two weeks ago seems to be increasingly unlikely and is no longer the mainstream view on Wall Street.
This interest rate reduction expectation is close to the author's consistent view over the past few months. In the author's view, the Sum rule is just one of many economic indicators. In addition to this, other forward-looking indicators do not show signs of a hard landing, and the sharp decline in non-farm employment data is just a return to normal from the previous overheated state. It needs to be closely observed, but it should not be overreacted to for the time being. U.S. economic growth, consumer confidence, employment growth, and even inflation currently seem to be returning to normal.

The just-released Merrill Lynch August Global Fund Manager Survey (FMS) shows that 76% of fund managers believe that the U.S. economy will have a soft landing in the next 12 months, compared to 13% who believe in a hard landing and 8% who believe in no landing. Despite the recent sharp decline in new employment, the proportion of fund managers who believe in a soft landing is the highest in the past two years. The same survey shows that the proportion of cash held by fund managers has risen to 4.3% (compared to 4.1% last month). Although the amount of cash held has increased slightly under market turmoil, the proportion is still the second lowest since the end of the pandemic, and in fact, it is more than half less than the cash held in October 2022. The so-called "derisking" is just a token gesture.
From August 22-24, the U.S. Federal Reserve will hold its annual economic policy conference in Jackson Hole, Wyoming. The theme of the conference is "Reassessing the Effectiveness and Transmission of Monetary Policy" (reassessing the effectiveness and transmission mechanism of monetary policy). Financial media from all walks of life will gather in this holiday town, focusing on Fed Chairman Powell's keynote speech. Given that the Fed only recently relaxed its stance on interest rate cuts at the end of July and is likely to lower policy rates in mid-September, Powell may take the initiative to describe the future interest rate reduction path at the meeting.
The Fed's current understanding of the economic environment is as follows: 1) The worst time for inflation has passed, and it is only a matter of time before it returns to the policy target, but there may still be fluctuations; 2) The risk of economic recession has increased, and the job market needs close attention, but for now, the chance of a soft landing is relatively high; 3) Financial market fluctuations have increased, and guidance through words is needed, but there is no need for direct intervention for the time being; 4) Some parts of the real economy have been hit hard by high interest rates, from credit card overdues to commercial property liquidity. Problems are accumulating but have not构成systemic risk.The author believes that what Powell is about to initiate is a step-by-step interest rate reduction pattern, steadily advancing the normalization of the interest rate environment with high transparency, gradually lowering the policy interest rate to a neutral level (that is, neither stimulating nor inhibiting the economy), allowing the economy to complete the last stage of the downturn in market self-regulation. At the same time, pay attention to the risks of recession and inflation, and maintain market order. The author believes that the opportunity for a large-scale interest rate reduction is very low at present, and if the Federal Reserve acts too drastically, it may cause market panic.
The core logic of this judgment is that the US economic growth, consumer confidence, and inflation are all achieving "normalization". Leaving the super overheating state does not mean sliding directly into a recession. At the end of the economic cycle, it is normal for economic data to decline, and there is no need to panic about a significant decline. The most important observation data has shifted from inflation to consumer confidence, and the leading indicators of consumer confidence can be found in the job market.
Using the recent remarks of the President of the Chicago Federal Reserve to summarize the position of the Federal Reserve, "The Federal Reserve's decisions are unrelated to elections, and the Federal Reserve's decisions are related to the economy", "We do not react to the stock market, our goal is to maximize employment and stabilize prices". Since the end of July FOMC meeting, Federal Reserve Chairman Powell has not spoken in public for some time, and he will return to the spotlight this week.
There are many major events this week, 1) The Federal Reserve's Jackson Hole annual meeting, Powell is scheduled to deliver a speech on the morning of the 23rd. 2) The Democratic Party holds its national convention, and Kamala Harris will deliver an acceptance speech on the 22nd and officially become the presidential candidate. 3) The Governor of the Bank of Japan, Ueda, explains the interest rate hike at the end of last month at a special congressional hearing. 4) The ECB releases the minutes of the July policy meeting. 5) The Federal Reserve releases the minutes of the July FOMC meeting. In addition, attention can be paid to the Eurozone HCOBPMI.