Admin August 5, 2024
Speaking to USA TODAY, Chicago Federal Reserve President Austan Goolsbee suggested conditions were right for a rate cut.
Stock market investors fear U.S. recession
A global stock market drop triggered fears of a U.S. recession with investors, but experts say the ‘Sahm rule’ threshold hasn’t been met.
- ‘If the economy starts to deteriorate, the Fed’s job is to act and we will act appropriately,’ Goolsbee said.
- Apple had its worst day since September 2022, shedding 4.82%.
The S&P 500 Index closed 106 points, or 3%, lower on Monday after a hair-raising morning drop, while the technology heavy Nasdaq composite fell 3.43% and the Dow Jones plummeted more than 1,000 points, losing 2.6%, as global markets washed out over worries of a possible recession in the world’s biggest economy.
The S&P 500 and the Dow saw their biggest drops since September 2022. The market carnage shaved $907 billion off Nasdaq’s market value.
“So much for the summer lull,” said Neil Shearing, group chief economist at Capital Economics, in a commentary. “Stock markets are in turmoil and bond yields have plunged as fears about a U.S. recession have taken hold.”
Driving the rout: Sharp declines in high-flying tech stocks including Nvidia, Apple, and Amazon, and a disappointing jobs report. Apple had its worst day since September 2022, shedding 4.82%. As investors ran to buy U.S. Treasurys, mortgage rates declined, opening the door for some borrowers to refinance, experts said.
These are the day’s top develoments.
President Joe Biden didn’t respond directly to Monday’s market panic, and instead released a statement touting his student loan forgiveness program and the expansion of college Pell grants.
The White House kept its head down as Donald Trump and his allies worked overtime to pin the stock market carnage on Biden and Vice President Kamala Harris, the Democratic presidential nominee.
As the tech-heavy Nasdaq index shed more than $900 billion in value and the Dow Jones average lost more than 1,000 points, Biden released a statement on X apparently aimed at younger voters.
“In three years, my Administration canceled student debt for nearly 5 million borrowers through various actions, made the largest increases to the Pell Grant in a decade, and fixed Income-Driven Repayment so borrowers get the relief they are entitled to,” the statement said. “I’m not done yet.”
Trump reveled in labeling the day’s losses the “Kamala Krash.” Earlier this year, the former president took credit for record stock market highs, calling them a signal that investors favored his campaign to retake the White House.
−Dan Morrison
What does Chicago Fed President Goolsbee say about rate cuts?
The Federal Reserve has only two jobs by law: stabilize prices and maximize employment, Chicago Federal Reserve President Austan Goolsbee emphasized in an interview with USA TODAY.
“That’s the dual mandate,” he said. “That’s the thing that will determine what the Fed does on rates. There’s nothing in the Fed’s mandate that says stop market declines. Or, you know, keep traders whole on days when there’s volatility, right?”
“If the economy starts to deteriorate, the Fed’s job is to act − and we will act appropriately,” he said.
−Medora Lee
More: Jobs report: Unemployment rise may mean recession, rule says, but likely not this time
What does Goolsbee say about the jobs report?
Goolsbee admitted the jobs report was “negative” but also noted it was only one month of data. The payrolls increase of 114,000 may have missed economists’ average forecast of 175,000, but he said that’s within the margin of error, which is plus or minus 100,000.
“The job of the central bank is to be steady and take the totality of the evidence when making decisions,” he said. “So if you get down in the weeds of this jobs report, it was negative, but there were some things that were cross currents that make it … a little less directly clear. Like the unemployment rate went up more than people thought, but the labor participation rate and the employment to population ratio both rose, which is kind of unusual. Normally, the recessionary signs are when the unemployment rate is rising because layoffs are going up.”
More: Is this a correction or a recession? What to know amid the international market plunge
Goolsbee added that “the Fed set the rate at the level it is now a year ago, and the conditions were very different a year ago than they are today” and it may be time to reconsider those rates. The Fed funds target rate is currently at a 23-year high, between 5.25%-5.5%.
“You only want to be that restrictive if you’re afraid of (the economy) overheating,” he said. “And my thing is, this is not really what overheating looks like.”
−Medora Lee
More: Chicago Fed’s Goolsbee says jobs data weak but not necessarily recessionary
While some economists say current market conditions raise the risk of a recession within the next 12 months, others are downplaying concerns.
“The recession fears are overblown,” said Scott Wren, senior global market strategist at Wells Fargo. “It’s not time to panic here.”
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Wells Fargo economists said they expect an economic slowdown – not a recession − noting the labor market is in the early stages of weakening and “still some distance away from even the most moderate, modern recession,” which took place in 2001. The bank also noted consumer spending has potential to grow as household purchasing power strengthens.
Goldman Sachs Group on Sunday raised the probability of a recession within the next year from 15% to 25% but see the risk as “limited,” Bloomberg reported.
Recession worries stem, in part, from the July job report’s triggering of the Sahm rule, a measure that says if unemployment based on a three-month average rises by at least a half percentage point over the past 12 months, the nation is likely in a recession.
Claudia Sahm, a former Federal Reserve economist, cautioned against taking too much of a signal from her namesake rule in a post-COVID labor market. She told Bloomberg Television “it is very unlikely that we are in a recession,” but “we’re getting uncomfortably close to that situation.”
“A really important question is, where are we headed?” Sahm said. “And those changes in the employment rate that the Sahm rule picks up on do not look encouraging. They’re headed in the wrong direction, and that momentum is what can get us in trouble.”
−Bailey Schulz
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The yen hit a 7-month high against the dollar Monday as investors weighed the prospects for more aggressive Federal Reserve rate cuts against higher rates in Japan.
If Japan is raising rates and the Fed is lowering them, traders likely will look to buy yen to catch the move up on rates and sell the dollar for better returns.
The yen had already been on the rise after the Bank of Japan unexpectedly hiked its short-term policy rate last Wednesday to 0.25% from 0.05% and signaled more increases ahead.
The Japanese currency got another leg up after the Labor Department reported weaker-than-expected jobs growth for July and a jump in the unemployment rate to 4.3%, triggering recession fears.
Rising Japanese rates also had other traders unwinding what’s called the carry trade, reports said. A carry trade is when investors borrow in yen at low interest rates and invest in higher-yielding assets elsewhere.
If Japanese rates rise, the carry trade becomes less profitable, leading investors to sell their higher-yielding investments and buy back yen, thus increasing its value.
Japan’s Nikkei index fell to a seven year low on Monday.
−Medora Lee
Did the Fed wait too long to cut rates?
There are concerns the Fed waited too long to cut interest rates and will need to play catch-up with large cuts in borrowing costs to cushion the economy.
In June, U.S. central bankers anticipated only one cut this year, and saw the unemployment rate ending the year at 4%.
With the jobless rate now well above that, “the soft landing in the U.S. labor market is in danger,” wrote Nick Bunker, director of North American economic research at Indeed Hiring Lab, referring to a scenario where inflation is tamed without a painful recession or sharp rise in unemployment.
Goldman Sachs now sees a steady every-meeting series of Fed rate cuts and Citi called for half-percentage-point cuts in both September and December. JP Morgan said there was a strong case for a cut even before the Fed’s next meeting.
“We’ll see what happens over the next several weeks in terms of market environment, but if anything, I think this will encourage the Fed to take action, which is really what the market is looking for,” said Harvey Schwartz, CEO of private equity firm Carlyle.
−Bailey Schulz, with Reuters
For months, market observers have been talking about a popular trade in which investors borrowed in Japanese yen at very low interest rates, and then invested the borrowed money in high-growth investments like the “Magnificent Seven” tech stocks that include Apple, Amazon, Alphabet, Tesla and Meta.
Concerns about the carry trade had been rising for weeks, in part because of the enormous amount of money involved in it − an estimated $4 trillion. Those concerns soared on July 31, when the Bank of Japan raised interest rates from 0.1% to 0.25%.
That rate is still very low, of course, and in and of itself not a big deal for the carry trade. But it was the bank’s largest rate hike since 2007, and currency traders took note of the implications.
With the yen stronger against the dollar, traders had to spend more to continue holding their “Magnificent Seven” stocks − and many chose to sell instead, helping to fuel a market panic.
−John Rosevear, The Motley Fool
More: What is a carry trade, and how did a small rate hike in Japan trigger a global sell-off?
U.S.-listed shares of crypto-linked companies slumped as Bitcoin fell more than 15% on Monday amid a frenzied selling of risky assets.
The plunge marks a stunning reversal for the sector that until recently was riding a wave of optimism sparked by the approval of exchange-traded funds tied to the spot prices of Bitcoin and Ether, the two biggest cryptocurrencies.
Republican presidential candidate Donald Trump’s pro-crypto speech at a bitcoin conference last month also bolstered confidence, but data showing higher unemployment and weak manufacturing activity squeezed risky assets.
−Reuters
More: Trump pledges national Bitcoin stockpile, to make US ‘crypto capital of the planet’
Outages at Vanguard, Schwab and others
As the stock market cratered this morning, thousands of customers reported outages at Vanguard, Schwab, TD Ameritrade, Fidelity, and Robinhood, according to downdetctor.com.
Schwab posted on X just after 9 a.m. ET “Due to a technical issue, some clients may have difficulty logging in to Schwab platforms” and “hold times may be longer than usual.”
Robinhood briefly halted trading on its 24-hour platform overnight, reports said. Fidelity also posted it was having issues Monday morning.
As trading moved into midday, downdetector.com data showed outages were easing.
−Medora Lee
For regular Americans, there was little to do Monday but sit and watch the stock-ticker train wreck. While it’s hard to stay calm as the stock market reels, amateur investors should at least try.
“My best advice is, don’t panic. Really, because you can’t,” said Catherine Valega, a certified financial planner in Boston.
If anything, financial advisers say, this summer stock swoon would be a great time to buy. “Stocks are on sale today, right?” Valega said. “If you have some cash, let’s go put some money in the market.”
− Daniel de Visé
More: ‘Don’t panic’: What to do when the stock market sinks like a stone
What are circuit breakers?
In the event of a severe market price decline, U.S. exchanges have procedures, known as marketwide circuit breakers, that may halt trading temporarily or, under extreme circumstances, close the markets before the normal end of the trading session. The circuit breakers are calculated daily based on the prior day’s value of the S&P 500 index.
By late Monday morning, the market wasn’t approaching circuit-breaker territory. The S&P 500 was around 5200 − well above 4972.3, the tripwire for a Level 1 breaker.
The circuit breaker was last tripped 10 times in four days during a pandemic sell-off in 2020.
− Medora Lee
How much does the S&P 500 have to fall today to trigger circuit breakers?
Here are the three levels at which marketwide circuit breakers will be hit − and what happens if each one is breached:
◾ Level 1: 7% decline, or at 4,972.3 before 3:25 p.m.: Trading is halted for 15 minutes and then resumes unless level 3 is breached.
◾ Level 2: 13% decline, or at 4,651.5 before 3:25 p.m.: Trading is halted for 15 minutes and then resumes unless level 3 is breached.
◾ Level 3: 20% decline, or at 4,277.24 any time: Trading is halted for the remainder of the day.
Each circuit breaker can only be triggered once a day. For example, if a Level 1 market decline occurred and trading was halted and then reopened, the Exchange would not halt the market again unless a Level 2 decline occurred.
− Medora Lee
The market panic has been building for days.
◾ Over the weekend, billionaire investment guru Warren Buffett ignited speculation he’s soured on stocks as Berkshire Hathaway reported a $276.9 billion cash stake as of June 30, up from $189 billion, after selling another large portion of its stake in Apple.
◾ That reinforced investors’ fears the economy may be slowing. The Labor Department reported Friday that the U.S. economy added only 114,000 jobs in July and the unemployment rate had jumped to 4.3%.
◾ Most worrying was the sharp rise in the jobless rate triggering what economists call the Sahm rule, which says that if unemployment rises by at least a half percentage point over the past 12 months, the nation is probably in a recession. The rule has correctly predicted all U.S. recessions since the 1970s.
− Medora Lee
Who is Warren Buffett?: Why investors are looking to the ‘Oracle of Omaha’ this week
Former President Donald Trump weighed in on the market carnage on Monday, pinning the blame not on overheated tech stocks, but on his November opponent: Vice President Kamala Harris.
“KAMALA CRASH!” Trump wrote in a post on his Truth Social website.
Mortgage rates: Daily mortgage rates for August 5, 2024: Rate movements mixed
Republican vice presidential nominee JD Vance was more loquacious, using the stock market panic to assail Harris’ leadership. “This moment could set off a real economic calamity around the globe. It requires steady leadership–the kind President Trump delivered for four years,” he wrote on X, formerly Twitter. “Kamala Harris is too afraid to answer media questions and cannot lead us in these troubled times.”
Neither post mentioned President Joe Biden.
The Democratic Party fired back with a post noting job losses during Trump’s one-term presidency. “Trump left office with fewer jobs than when he entered—one of the only presidents to do so. President @JoeBiden and Vice President @KamalaHarris have overseen nearly 16 million jobs created since they took office—one of the greatest economic comebacks of any administration.”
− Dan Morrison
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It’s turning into a wild day for investors, homeowners and people hoping to retire, with lots of market terminology flying across the internet. Here’s a brief glossary of terms giving a name to the financial pain:
◾ Correction. A market drop of at least 10% from a recent high, which typically occurs about once a year
◾ Pullback. When a specific stock or the market retreats 5% to 9.99% from a peak. While corrections may prompt some investors to reach for the Xanax, pullbacks can also be unnerving after long stretches of market calm. That said, pullbacks – which normally occur three to four times a year – are viewed as healthy and as buying opportunities.
◾ Volatility. How much a stock or the market fluctuates in a period of time.
◾ Bear market. When a stock or market index falls 20% or more.
◾ Bull market. A sustained rise in stock prices without a bear market, or a 20% drop.
Buffett is a billionaire businessman and philanthropist whose influence on the U.S. stock market is significant. Dubbed the “Oracle of Omaha,” Buffett is considered one of the most successful investors of all time. He runs Berkshire Hathaway, a major conglomerate that owns GEICO, Duracell, Dairy Queen and other companies. And Berkshire’s recent sale of a large portion of shares it owned in Apple sparked fears that Buffett might be souring on stocks amid a slowing economy.
Wall Street’s most watched gauge of investor anxiety logged its largest ever intraday jump on Monday, as U.S. stock futures tumbled on rising fears the country could be tipping into recession.
The CBOE Volatility Index jumped to a high of 65.73, up about 42 points from its close on Friday, as Wall Street looked set to continue the global stock rout that saw Japanese shares at one point exceed their 1987 “Black Monday” loss.
The VIX was last up 34 points at 57.15, its highest since March 2020.
“It seems like a liquidity crisis … this is very, very unusual,” said Joe Tigay, portfolio manager for Rational Equity Armor Fund.
− Reuters
More: What happens during a recession? Here is what is impacted in the economic downturn
Mortgage rates tumble
With the drop in Treasury yields, mortgage rates have followed.
That could open the door to refinancing, said Greg McBride, chief financial analyst at comparison site Bankrate.
“After months of dawdling at or above the 7% mark, mortgage rates are reversing sharply,” he said. “If you took a mortgage at a rate above 7%, the refinancing door has swung open. If you have an adjustable-rate mortgage you’re looking to get out of, this is your chance. Mortgage rates are likely to fall further in the months ahead, but there are no guarantees and current rates are a bird in the hand for prospective borrowers.”
A 30-year fixed mortgage rate on Friday was 6.4%, according to Mortgage News Daily.
− Medora Lee
Silicon Valley giants are pushing down U.S. stocks Monday morning, Bloomberg reported. Nvidia fell 12%, Apple lost 9.3%, Amazon dropped 7.4%, and Meta lost 7.6%, Bloomberg said. Google fell 5.4%, and Microsoft has lost 4.9%.
− Dan Morrison
How are Treasurys reacting? And what are the odds of a Fed rate cut?
Treasurys are benefitting as safe-haven purchases amid the market turmoil, forcing yields to drop significantly. Yields and bond prices move in opposite directions.
Yields on 10-year Treasurys fell to the lowest in more than a year.
“The Federal Reserve left short-term rates unchanged, but expectations for future cuts increased,” Bas Kooijman, chief executive and asset manager of DHF Capital S.A, wrote in a note referring to the Fed’s decision last week.
This morning, the CME FedWatch tool shows the odds for a Federal Reserve rate cut in September at 87.5%.
After Friday’s weak jobs report, many economists revised their rate cut forecasts. Instead of a quarter percentage point cut, they are now expecting a more aggressive half-point reduction.
− Medora Lee
Chicago Federal Reserve Bank President Austan Goolsbee on Monday said while employment data on Friday was weaker than expected, it does not look like a recession. Fed officials must stay on top of changes in the environment to avoid being too restrictive with interest rates, he added, an apparent nod to recent calls for the Fed to cut rates.
“You only want to be that restrictive if you think there’s fear of overheating,” Goolsbee told CNBC. “These data, to me, does not look like overheating.”
His comments came amid a global stock market selloff that accelerated on Monday in the aftermath of a disappointing U.S. employment report on Friday and the Fed’s decision last week to leave interest rates unchanged. Fed officials, however, signaled they could cut rates at their next meeting in September.
− Reuters
Oil prices dropped to a six-month low as investors worry about recession and war in the Middle East.
A recession would lessen demand for goods and services and therefore, oil for manufacturing and transporting.
Meanwhile, oil traders are worried about escalating tensions in the Middle East after Secretary of State Antony Blinken said Sunday an Iranian attack on Israel could happen within 24 to 48 hours. Iran on Monday reportedly issued a notice to pilots and aviation authorities to avoid its airspace.
WTI was down 0.76% at $72.96 per barrel at 9:16 a.m.ET while Brent fell 0.66% to $76.30 per barrel.
− Medora Lee
