Aurelia Butler

ORLANDO, Florida (Reuters) -“Up the escalator, down the elevator shaft” is a well-worn FX market maxim describing the dollar’s typical moves against the yen. The U.S. currency tends to rise steadily over time, but when it turns, it can plunge rapidly.    It is equally applicable to U.S. interest rates, and describes what we may be about to witness as an unusually large wave of volatility crashes over world markets.Fed rate-hiking cycles are often conducted gradually, at former Fed Chair Alan Greenspan’s famous “measured pace”. But not easing cycles.    History shows that rate cuts are often large, aggressive and reactive because policymakers are forced onto the back foot and into frantically responding to damaging forces spiraling out of control, like recession or severe financial market dislocation.    Or both.Or put another way, the economy practically never enjoys the fabled “soft landing”. Instead, it’s often facing an emergency landing. And that’s because lagging behind is more a feature of Fed policy than a bug.HISTORY LESSON    Chicago Fed President Austan Goolsbee said on Friday it was the central bank’s job to act in a “steady” way. A Fed paper in May titled “Lessons from Past Monetary Easing Cycles” concluded that “successful policy management appears more likely when policymakers act early, more parsimoniously, and preemptively”.    But despite their best intentions, policymakers’ reaction function is rarely steady.Since 1990, the central bank has raised rates 51 times and cut them 46 times. This may seem a little surprising given that inflation was below target for much of that time.    But rate cuts have been more aggressive than hikes, perhaps understandably in light of the dotcom crash, global financial crisis and COVID-19 pandemic. The fed funds rate fell to virtually zero in two of these episodes, and, in one case, it stayed there for almost seven years.    The policy rate has been raised by a quarter of a percentage point 40 times, and by half a percentage point or more 11 times. Until the surge in global inflation after the pandemic and Russia’s invasion of Ukraine, the Fed had raised rates by 75 basis points only once, in November 1994. It did so four times in the most recent hiking cycle.    That compares with 28 quarter-point cuts since 1990 and 18 reductions of 50 bps or more, including seven cuts of 75 bps or more.    There have only been two Fed easing cycles in the last 40 years that could be characterized as smooth and gradual: the early 1990s when most of the 525 bps of cuts were delivered in quarter-point clips, and the mid-1990s when recession was averted with only three quarter-point cuts over eight months.DESIGN FLAW    In many ways, the Fed is a victim of its own strategy. It is a data-driven, consensus-driven decision-making body, so it has to see the hard economic data first before it acts. Given that it often relies on lagging indicators, it will, by definition, almost always be “behind the curve”. Its challenge is to ensure that this lag is as short as possible.    Its other option is not much better. Bob Elliott, CEO at Unlimited Funds and a former executive at Bridgewater, says the Fed’s “fundamental construct” means it is a reactive institution with limited powers of prediction, so it is better to observe than predict.    “The alternative is to manage policy based upon predictions and trying to get ahead of the curve. Evidence suggests the Fed has little to no ability at predicting what is going to happen,” Elliott says.    Others are less charitable, however. They argue that it is absolutely the Fed’s job to be proactive in calibrating policy so that it meets its twin goals of “maximum employment and stable prices” and ensures financial stability.    “It’s dangerous to have ignored all the recession indicators, just as they did in 2008,” says David Blanchflower, professor of economics at Dartmouth College and former Bank of England rate-setter. “They are now playing catch up as the bad data comes in.”UNPRECEDENTEDWill this time be different? When the Fed paper mentioned above was published in May, the rates market was pricing in around 125 bps of Fed easing between then and the end of 2025. But as the paper’s authors noted, “Compared to the historical record, such shallow easing after roughly a year and half from the start of easing would be unprecedented.”May seems like a long time ago. Stock prices and bond yields are tumbling rapidly now, and the VIX volatility index – Wall Street’s “fear index” – is at its highest-ever level except for 2008 and 2020.If history is any guide – rates were slashed to zero in those two instances – we should be looking out for that elevator shaft.(The opinions expressed here are those of the author, a columnist for Reuters)(By Jamie McGeever;Editing by Helen Popper) More

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This outlook comes amid speculation about an imminent rate cut in September and fears of an economic downturn based on the SAHM rule.Dovish Fed Reaction: Bank of America highlights a “dovish change in the Fed reaction function,” which has set the stage for a potential rate cut in September. This proactive stance by the Federal Reserve is seen as a mitigating factor against a severe economic downturn.Rate Cuts and Labor Market Dynamics: While the labor market has shown signs of weakening, leading to near-term rate cuts, Bank of America argues that this does not necessarily spell a hard landing. They acknowledge the “suddenness of the ‘crack’ in the labor market” but suggest that the policy response could stabilize the situation without leading to a severe recession.Loan Market Resilience: The analysts discuss the potential impact on the loan market, noting that a rate-cutting cycle might “suppress loans’ overall appeal” but would also “diminish the tail risk from defaults.” They believe that if growth concerns don’t dominate, the loan market could avoid significant underperformance, which would otherwise be driven by increasing credit risk.Investment Grade (IG) Bonds: In a scenario where the economy faces turbulence, BofA says IG bonds are expected to be the “biggest beneficiary” as investors seek safety. The report states, “HY will likely remain moderately impacted,” while IG is poised for gains due to a “flight to quality trade,” especially given its recent underperformance.Overall, Bank of America analysts remain cautiously optimistic, suggesting that while challenges exist, these four factors provide a buffer against a hard landing for the economy. More

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The U.S. unemployment rate jumped to near a three-year high of 4.3% in July amid a significant slowdown in hiring, fuelling concerns fears that the labor market was deteriorating and potentially making the economy vulnerable to a recession.BofA Global Research brought forward its expectation of the first cut to September from December, while other major brokerages now expect the Fed to cut rates in all the three remaining meetings of the year. Here are the forecasts from major brokerages after the July unemployment data:New rate cut estimates Old rate cut estimates (in (in bps) bps) Sept Nov Dec Sept Nov Dec Goldman 25 Sachs 25 25 25 25 BofA Global Research 25 — 25 — — 25 UBS 50 25 Global Wealth 50 25 Management J.P.Morgan 50 50 25 — — — Wells 25 Fargo 50 50 25 25 Nomura 25 25 25 25 25 Deutsche Bank 25 25 25 25 25 25 Morgan Stanley 25 25 25 25 25 25 Citigroup 50 50 25 25 25 25 TD Securities 25 25 25 — — — Peel Hunt 25 25 25 25 — 25 Barclays 25 25 25 25 25 * UBS Global Research and UBS Global Wealth Management are distinct, independent divisions in UBS Group More

U.S. stock futures rose Tuesday, rebounding after the previous session’s sharp losses on concerns that the U.S. economy was heading towards recession. By 04:25 ET (08:25 GMT), the Dow futures contract was 240 points, or 0.6%, higher, S&P 500 futures climbed 50 points, or 0.9%, and Nasdaq 100 futures rose by 175 points, or 1%.The Wall Street indices suffered a brutal start to the new week, with the blue chip Dow Jones Industrial Average dropping over 1,000 points, or 2.6%, and the broad-based S&P 500 index falling 3%, their worst sessions since September 2022. The tech-heavy Nasdaq Composite slipped 3.4%, tumbling deeper into correction territory.Results from industrial bellwether Caterpillar (NYSE:CAT) are due later in the session, and will give more insight into the health of manufacturing and the consumer. Super Micro Computer (NASDAQ:SMCI) is also expected to report, and will be in particular focus as it is at the center of the market’s artificial intelligence excitement.Palantir Technologies (NYSE:PLTR) surged 10% premarket on strong quarterly results and a guidance lift, while Lucid Group (NASDAQ:LCID) rallied over 13% on better-than-expected revenue in the second quarter.Alphabet (NASDAQ:GOOGL)’s Google violated antitrust law, a U.S. Federal Judge ruled on Monday, as the tech giant lost its legal battle against the Department of Justice, the first big win for federal authorities taking on Big Tech’s market dominance.“Google is a monopolist, and it has acted as one to maintain its monopoly,” Judge Amit Mehta in Washington ruled on Monday.The judge concluded that Google has “violated Section 2 of the Sherman Act by maintaining its monopoly in two product markets in the United States general search services and general text advertising-through its exclusive distribution agreements.”The ruling, which can be appealed, marked a major win for the DoJ, who had argued that Google’s agreements with companies, including Apple (NASDAQ:AAPL), to make Google the default search engine on smartphones violated antitrust laws. The ruling paves the way for a second trial to determine potential fixes, possibly including a breakup of Google parent Alphabet, and also offers encouragement to the U.S. antitrust authorities prosecuting the powerful Big Tech companies.Kamala Harris is set to unveil her vice presidential running mate later Tuesday, her first major decision as the Democratic Party’s presidential candidate as she attempts to win the White House in November.Harris has narrowed her list of candidates to Pennsylvania Governor Josh Shapiro and Minnesota Governor Tim Walz, Reuters reported, citing sources.Harris became the Democratic Party’s standard bearer after President Joe Biden ended his re-election campaign last month, gathering sufficient delegates to be her party’s nominee, and prompting the Democratic National Committee late on Monday to confirm she had officially secured the nomination.Harris is expected to appear with her running mate at an event in Philadelphia late Tuesday.Most Asian stock markets rebounded Tuesday, with Japan’s benchmark Nikkei 225 index leading the way.The Nikkei surged 10% Tuesday, helped by some bargain buying, as traders piled into heavily discounted stocks with strong fundamentals, and which are likely to benefit from lower interest rates in the coming months.That said, the Nikkei still remained in bear market territory after tumbling just over 12% in the prior session, its worst day since the 1987 Black Monday crash.Still, a recovery in Japanese markets was still a “little time away,” with markets likely to trade flat in the near-term before gaining enough confidence for a recovery, Citi analysts said in a note.The near-term outlook for Japanese markets remains dour, with Citi forecasting risk-off trades to “dominate.” The brokerage recommended defensive sectors in the near-term. The brokerage said that a brief U.S. recession, guarantees of stimulus support for the global economy and a less hawkish tone from the BOJ will be needed to spark a recovery in local markets. Crude prices rose Tuesday, rebounding from eighth-month lows as traders took advantage of battered levels to restock and as MIddle East tensions remain.By 04:25 ET, the U.S. crude futures (WTI) climbed 0.4% to $73.25 a barrel, while the Brent contract rose 0.2% to $76.44 a barrel.Concerns over an escalation in the Israel-Hamas war, especially after Iran vowed retaliation over the killing of a Hamas leader in Tehran, have provided an element of support for the oil markets.However, sentiment remains very fragile amid fears slowing economic growth will dent demand, especially as underwhelming U.S. labor market readings ramped up concerns over a potential recession in the country.The weak U.S. labor readings were preceded by dismal readings from China, especially on the country’s manufacturing sector, added to concerns over slowing demand in the world’s biggest oil importer.More readings from China are due later this week, with trade data for July in particular focus as it will provide insight into the country’s oil imports.Saudi energy giant Aramco (TADAWUL:2222) reported a 3.4% decline in its second-quarter net income earlier Tuesday on lower crude volumes.  More