Global Economic Uncertainty Persists Despite Rate Cut Expectations

Rate cuts can't cure economic jitters

The stock market's mid-week attempt at a rebound was like trying to light a damp matchstick. Thursday was a slog, and Friday isn't looking any better, after weaker-than-expected employment data. The financial sector's rate cuts enthusiasm has been squashed by several factors, which I'll now explain. Investors are like kids at Christmas: they beg for an electric water pistol for weeks, then abandon it for the latest FIFA game. They are about to get the interest rate cuts they've been clamoring for, but now they seem unimpressed. Let's dig into why. Since mid-July, U.S. stock market sessions have been jittery. This coincides with second-quarter earnings reports, doubts about the short-term financial impact of artificial intelligence, and a temptation to return to discounted stocks that have been struggling. This shift usually hurts growth stocks, especially big tech companies. Investors are banking on central banks to keep things exciting. The eurozone started easing monetary policy weeks ago, the UK joined in yesterday, and the U.S. is expected to follow in September. The Fed hinted at this on Wednesday, aligning with market expectations. Investors are even hoping for a second rate cut before year-end, maybe even a third. With only three Fed meetings left this year, this means a quarter-point cut at each meeting. Chop, chop, chop. The Fed could cut rates by 50 basis points or even 100, but central banks avoid drastic moves to maintain control. Something catastrophic would need to happen for a 50 basis point cut all at once. So, the current scenario is three rate cuts by year-end. This week's sharp drop in U.S. bond yields reflects this. The 10-year yield fell below 4%, its lowest since early February. In other words, Americans believe money will get cheaper faster than they hoped. They've got what they wanted. So why are markets falling? Great question. Mainly because the risk of a severe economic slowdown is back, overshadowing the rate cuts. Wall Street economists' models are flashing warning signs. Corporate results are mixed, China isn't bouncing back, trade and political tensions are rising, AI benefits are limited to toolmakers, consumer spending is iffy, and U.S. macroeconomic indicators are shaky. Yesterday's poor ISM manufacturing index heightened doubts about economic momentum and revived the term "landing," which had faded from finance discussions. Investors had debated whether the Fed's high rates would cause an economic crash, a crash landing, or a soft landing. The "no landing at all" view prevailed until early August when fears resurfaced. To make matters worse, market leaders are out of sync. The Magnificent Seven showed mixed financial performance in Q2. Alphabet and Meta did well, but Microsoft disappointed, bogged down by global IT issues from a CrowdStrike failure. Apple reported mixed results but promised AI would revive growth. The stock barely reacted because promises are cheap. Amazon's performance fell short of AI-driven hopes, and the stock plunged 7% in after-hours trading. Tesla is struggling, and Nvidia can't help since its quarterly report is delayed until August 28. Outside this sphere, Intel's stock sank after another disappointment, and Booking is facing declining consumer spending. Investors are shifting to defensive stocks, mainly in healthcare. Listed real estate gained from the prospect of lower rates but remains fragile. Overall, the mood is gloomy, and the mid-week market boost was a flash in the pan. Today's U.S. employment figures for July are crucial. Investors had hoped for slightly worse figures to push the Fed to cut rates. Now, they're dreading bad figures, fearing a major economic slowdown. And the data was indeed bad, since non-farm payrolls rose by 114,000 while 175,000 was expected, the unemployment rate reached 4.3% while 4.1% was forecast and hourly earnings rose 0.2%, instead of 0.3% expected. Futures on Wall Street tumbled after the release of the report, with - 2.6% for the Nasdaq, -1.8% for the S&P 500 and -1.4% for the Dow Jones. A US recession is now one of the main concerns for investors. In Asia-Pacific, it's a bloodbath. Tokyo's Nikkei 225 dropped 5.8%, and the TOPIX lost over 6%. Investors had long awaited stricter monetary policy from the Bank of Japan, but now they're panicking. The Japanese market is paying for its recent strong performance, a rising yen, narrowing interest-rate differential with the U.S., and global profit-taking. Hong Kong lost 2%, mainland China 0.9%. South Korea (-3.6%) and Taiwan (-5%) were hit hard by tech stock downturns. Even Australia saw profit-taking (-2%). India is holding up better (-1%). European indices are bearish, and so are Wall Street futures. Today's economic highlights: Non-Farm Payrolls and the Unemployment Rate, before Durable Goods Orders are on the calendar today. The full agenda is here. The dollar is falling to EUR 0.9234 and GBP 0.7849. The ounce of gold is up to USD 2,458. Oil fell, with North Sea Brent at USD 78.74 a barrel and US light crude WTI at USD 75.18. The yield on 10-year US debt falls to 3.93%. Bitcoin is trading at USD 64,500.

Take Five: Global rate cuts? We're halfway there

Aug 2(Reuters) - Global markets are heading into what promises to be another volatile week, as investors fret stocks might be looking too pricey and even a reasonably solid earnings season so far hasn't been able to soothe those jitters. Here is your look at what's big in markets in the coming week, from Lewis Krauskopf in New York, Rae Wee in Singapore, Kevin Buckland in Tokyo and Maggie Fick and Amanda Cooper in London. Around half of the world's developed-market central banks have started cutting interest rates - the Bank of England did so on Aug. 1 and the Federal Reserve is teeing up a cut for September. Global stocks, crypto and bonds have been rallying this year in giddy anticipation of central banks finally lowering interest rates, while inflation and economic growth gently tail off from their post-COVID highs. So far, so good. Recession appears unlikely. Earnings have been decent, with more beats than misses. The problem is when assets are "priced to perfection", it does not take much for disappointment to set in. And thin summer markets often mean more volatility. Weaker readings of U.S. business activity and employment have prompted investors to assess whether rate cuts are a reflection of an economy that is weaker than they bargained for and it is time to take some money off the table. A U.S. corporate earnings season that has come in better than expected so far gets a fresh test in the coming week, with a number of high-profile reports due. With more than half of S&P 500 companies having already reported, second-quarter earnings are on pace to have climbed 12.6% from a year earlier, LSEG IBES data showed on July 31. That is better than the 10.6% increase expected for the period on July 1. So far, 78.4% of companies have topped analyst estimates for earnings, nearly the same beat rate as in the prior four quarters. While most of the megacap companies will have reported already, other important results are expected in the days ahead. Those include industrial bellwether Caterpillar , media and entertainment giant Walt Disney, weight-loss drugmaker Eli Lilly and Super Micro Computer, which is at the centre of the market's artificial intelligence excitement. A slew of economic releases from China will reveal how its shaky recovery is taking shape in the second half of the year and chances are, the picture still is not going to be particularly rosy. The week begins with a private-sector survey on services activity, followed by trade data on Wednesday and a reading on consumer prices to round off the week. Recent Chinese data continues to point to a gloomy outlook, and a growing sense of urgency in Beijing's efforts to shore up the economy has since been reflected in its surprise rate cuts, with investors betting on more to come. Officials will be keeping a close eye on Friday's inflation report for clues on how much more needs to be done to bolster anaemic domestic demand, especially after policymakers signalled their support for more consumer-directed stimulus measures. 4/WEIGHTY RESULTS Novo Nordisk, Europe's most valuable company, releases its second-quarter results on Wednesday. The company's fortunes - and shareholder returns - have soared with the blazing success of its weight-loss drug Wegovy. Its market value has risen by $380 billion since it launched the anti-obesity injection three years ago, to $572 billion. The top questions for investors and analysts are: manufacturing capacity and supply. Novo and Eli Lilly and Co, the only other company, for now, with a rival obesity drug on the market, face the same challenge: increasing production of these medicines, which are delivered weekly in a self-injection pen. Lilly, which reports on Thursday, has quickly gained ground on Novo since launching Zepbound in December. Novo accounts for almost 4% of Europe's STOXX 600, so its results carry more weight for the broader index than ever. 5/CPI FLIPS RBA SCRIPT From an outside chance of a rate hike at the Reserve Bank of Australia's Aug. 5-6 policy meeting, traders switched to pricing in the risk of a rate cut by year-end instead - all because of one soft inflation reading. The Aussie dollar skidded to a three-month low and stocks surged to a record high, after core inflation unexpectedly slowed to a two-year low. This will be very welcome news at the central bank, which would have been very reluctant to raise rates already at a 12-year high amid flatlining economic growth, moribund consumer spending and a weakening labour market. Traders now put the odds of a rate cut at a coin toss for November, much sooner than the RBA's assumed timing of possible easing - around the middle of next year should inflation continue to slow as desired. (Compiled by Amanda Cooper; Graphics by Sumanta Sen, Pasit Kongkunakornkul, Kripa Jayaram, Prinz Matgulis and Vineet Sachdev; Editing by Tomasz Janowski)