Last night, the United States released retail sales data for July and the number of initial jobless claims for the week, both of which were better than market expectations. Coupled with this week's release of PPI and CPI, which were both lower than expected, it indicates that the U.S. economy can maintain resilience while inflation is easing, allowing the narrative of a soft landing to continue. In layman's terms, despite the significant interest rate hikes, the U.S. economy can avoid recession, and the upcoming Federal Reserve rate cut in September is expected to boost industries such as manufacturing and real estate, giving the U.S. economy a second wind to sustain growth. This is the best story for the current U.S. stock market.
For the global economy as well, the United States, as the engine of global demand, a soft landing in the U.S. economy can at least reduce the risk of a global recession.
Previously, we analyzed that the two main triggers for "Black Monday" were concerns about a U.S. economic recession and the unwinding of yen carry trades. Now, with the easing of concerns about a U.S. economic downturn and the dollar falling, the yen appreciation crisis is naturally resolved, which is like both major crises are subsiding.
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Last night, U.S. stocks opened high and continued to rise, with the Dow Jones Industrial Average up 1.39%, the Nasdaq up 2.34%, and the S&P 500 up 1.61%. Nvidia's stock price rebounded from a low of $90 to $122, rejoining the $3 trillion club. Today, Asian stock markets saw a broad rally, with the Nikkei 225 surging 3.64%, gaining more than 20% since Black Monday and entering a technical bull market; the Taiwan Weighted Index and the South Korean Kospi both rose by more than 2%, and the Hang Seng Index in Hong Kong also jumped 1.83%.
In contrast, the A-share market is quite disheartening. A soft landing of the U.S. economy is also a positive for A-shares, as the downward pressure on exports would be somewhat reduced. However, against the backdrop of a global stock market rally, A-shares were on the verge of turning negative, and if it weren't for the national team stepping in to support the market at the end of the day, it would have truly been a single green among a sea of red.
As of the close, the Shanghai Composite Index rose slightly by 0.07%, the ChiNext Index fell slightly by 0.08%, the Hang Seng Index in Hong Kong increased by 1.88%, and the Hang Seng Technology Index increased by 2.21%. The total transaction volume of the two markets was basically the same as yesterday, close to 600 billion. Looking at the industry breakdown, sectors such as communications, banking, pharmaceuticals, household appliances, and coal led the gains.
The "Goldilocks" story of U.S. stocksU.S. retail sales in July increased by 1.0% month-on-month, exceeding expectations of a 0.3% rise, with the previous figure revised from flat to a 0.2% decrease. The number of initial jobless claims for the week ending August 3 was 227,000, lower than the expected 235,000, while the number of continuing jobless claims for the same week was 1.864 million, below the anticipated 1.875 million. The significant outperformance of U.S. retail sales in July, along with the better-than-expected initial jobless claims for two consecutive weeks, suggests that the non-farm employment data for the month might have been influenced by a typhoon, introducing an element of randomness. The U.S. economy still demonstrates resilience, alleviating market concerns about an economic recession. Following the data release, the U.S. dollar index and Treasury yields strengthened. According to CME's "FedWatch," the probability of a 25 basis point rate cut by the Federal Reserve in September stands at 74%, while a 50 basis point cut is at 26%.
Readers should be aware that my judgment on the U.S. stock market has been quite accurate in this cycle. I also paid the price for my insights on Black Monday, reaping substantial profits from the Nikkei 225, Asia-Pacific Select, and the NASDAQ.
On August 2, the U.S. released non-farm employment data and unemployment rates for July that were worse than expected, causing a sharp increase in market concerns about a U.S. economic recession. There was even speculation that the Federal Reserve might cut rates earlier to counteract the risks, leading to a significant stock market plunge that night. On Monday, I mentioned in my review that the July non-farm employment and unemployment rates in the U.S. had elements of randomness, and the market's concerns about a U.S. economic recession were overblown. I then advised to pay attention to the U.S. ISM non-manufacturing PMI and subsequent economic data. If the data still show resilience, it would ease recession concerns, presenting significant opportunities for U.S. and Japanese stocks, among other markets.
It is common knowledge that the U.S. ten-year Treasury yield, which serves as the anchor for global risk asset pricing, typically moves in the opposite direction to the U.S. stock market. However, recently they have been moving in the same direction, a phenomenon I explained a few days ago. Previously, the main contradiction in the U.S. stock market was inflation; only when inflation subsided could interest rates be lowered, marking the stage of rate-cut trading. Thus, when U.S. employment and inflation were strong, the likelihood of a Federal Reserve rate cut would decrease. As the ten-year Treasury yield rose, the U.S. stock market would fall, and during the rate-cut trading phase, good economic news was bad news for the stock market.
Now that rate cuts have become a certainty, the main contradiction in the U.S. stock market is economic recession. Even with rate cuts, the stock market would still fall in the short term during a recession until a recovery begins. Therefore, when U.S. economic data show resilience, a decline in inflation and economic resilience signal a soft landing, which is the "Goldilocks" story, the only scenario in which U.S. stocks can rise. Although the ten-year Treasury yield increased last night, this was driven by eased recession concerns, with the probability of a 50 basis point cut decreasing and the probability of a 25 basis point cut increasing. In the recession trading phase, good economic news is good news for the stock market.
The stock market is complex, and we need to grasp the main contradiction. Since the participants are human and human nature is fickle, the patterns of the stock market do not follow the "one is one, two is two" certainty of mathematics or physics.
From last year to the present, market expectations for the U.S. economy have swung back and forth: when economic data were good, the market expected the Federal Reserve to delay rate cuts, leading to an upward trend in the ten-year Treasury yield and a weakening of the U.S. stock market, which tightened financial conditions and cooled down the U.S. economy. Then, when U.S. economic data weakened, the market expected the Federal Reserve to cut rates earlier, leading to a downward trend in the ten-year Treasury yield and a strengthening of the U.S. stock market, which loosened financial conditions and heated up the U.S. economy.
Before the next recovery, the trajectory of the U.S. economy will definitely be a downward curve, and market expectations will fluctuate along this curve. Although concerns about a U.S. economic recession have eased for now, do not forget that it is a downward curve. The weakening of the U.S. economy is an objective fact; it is just that the market has been overly pessimistic in the short term, and I will not elaborate on more supporting data here.In fact, the conditions for a soft landing are very stringent. The resilience of the U.S. economy itself is fundamental, but it also tests the Federal Reserve's expectation management. This kind of fluctuation in expectations will continue, and it is necessary to withdraw when the market is extremely optimistic, while times of extreme pessimism in the market are actually opportunities.
Risk warning:
The stock market involves risks, and investment should be made with caution. This article does not constitute investment advice, and readers need to think independently.
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