Do it yourself

BoJ rattled the markets by deepening commitment to normalization

First of all, the Bank of Japan hiked the policy rates by 15bps to 0.25%. Governor Kazuo Ueda committed that if the economy and prices move in line with our projection, we will continue to raise interest rates. BoJ does not see 0.5% as any key barrier when raising rates; clearly indicating that the shift in BoJ’s monetary policy is definite.

A steeper hike by the BoJ, than currently estimated, could present several short-term challenges for the global markets. A stronger yen on rising JGB yields could (i) adversely impact Japanese exports; (ii) worry the JPY borrowers who may have assumed a secularly weak JPY; (iii) affect Japanese flow of investments to other markets besides unwinding of JPY carry trade. Through a weaker JPY, Japan, along with China, has been one of the primary exporters of deflation to the western world, especially since the global financial crisis (GFC 2008-2009). With Japanese exports becoming dearer this could change.

Japanese equities are correcting sharply.

…so did the US Federal Reserve

The Federal Open Market Committee (FOMC) kept its key interest rate at 5.25% to 5.5%. Commenting on the decision, the Fed Chairman said, “unemployment has inched higher, while the path of inflation has come down significantly.” Chairman Powell described the current economy as both “historically unusual” and “completely different economy from a year ago.” He indicated that “The broad sense of the committee is that the economy is moving closer to the point at which it would be appropriate to reduce our policy rate”. The market is reading his statement as a strong signal for the beginning of an accelerated rate cut path commencing from Sep’24.

Immediately after Chairman Powell’s comments, the US bond yields fell sharply and market expectations rose from 0.25bps cut in 2024 to 75-100bps cut in 2024. Equities have been correcting for three weeks now, and the Tech benchmark NASDAQ has corrected over 10% from the July 2024 top.

A much below US unemployment data released last week is widely seen as a strong indicator for impending recession.

Chinese economy not responding to stimulus

China’s PMI data last week showed an unexpected contraction in the manufacturing sector. The widely followed Caixin PMI reading brought up concerns over a broader slowdown in the sector. Slowdown in Chinese economy despite multiple efforts to stimulate growth may not be a healthy sign for the global economy.

German economy shrank in 2Q2024

Germany, the eurozone's largest economy, unexpectedly shrank by 0.1% on a quarterly basis in the second quarter of 2024 against the expectations of a 0.1% increase. Investment in equipment and buildings dropped significantly as the industrial sector continued to be pressured by high interest rates. Growth for the entire European Union stood at 0.3% in the second quarter, maintaining the same pace as the first quarter.

The Employment Expectations Indicator (EEI) saw a significant drop (EU: -1.6 points to 98.7, euro area: -1.8 points to 97.8), falling below its long-term average for the first time since April 2021 in both regions.

India core sector growth at 20 months low

India's core sector growth eased to 20-month low of 4 percent in June, from 6.4 percent in the previous month, owing to a slowdown in five of eight industries and an unfavourable base. The first quarter growth was also lower at 5.7 percent compared with 6 percent in the first quarter of the previous year. Sequentially, the eight core industries contracted 3.1 percent.

These all may be seasonal trends and may not be indicative of a major problem for the economies of India and the world. The markets are trying to assimilate these trends by pausing a little. Investors may also be better off pausing a bit, in my view.