Pressure builds on the Fed to cut rates following market meltdown

The last couple of days have been a rollercoaster ride for market-watchers, after a massive stock selloff Monday saw markets somewhat recover following reassuring comments from US Federal Reserve officials and positive US service-sector job growth data. Yet the brief panic indicates that the market fundamentals undergirding this year’s equities gains may not be entirely sound — spelling further turbulence as the Fed attempts to chart a soft landing for the US economy.

The roots of the selloff: Monday’s meltdown follows the buildup of a confluence of pressures over the last few weeks, including jitteriness around the big tech stocks that have driven Wall Street to new heights; the Bank of Japan’s late-July rate hikes after decades of ultra-loose monetary policy; lower-than-expected US job growth numbers for July that heightened fears of a US recession; and disappointing earnings reports from major companies like Microsoft. While Tuesday’s rebound suggests that the selloff spiral may have been somewhat of an overreaction, some of these developments point to frailties in the assumptions undergirding financial market gains — including unfettered AI euphoria, confidence in continued loose Japanese monetary policy, and a surprisingly robust US economy.

As the immediate storm dies down, all eyes are fixed squarely on the Fed. Monday’s stock market plunge was accompanied by a surge in US government debt, with two-year treasury yields falling below those of the ten-year notes for the first time in two years. This phenomenon, known as yield curve disinversion, has preceded the last four US recessions, and has heightened fears that the Fed’s decision to put off rate-cuts at its last meeting has tipped the US economy into recession. Markets, which last week began pricing in a hefty 50 bps rate cut in September, are now beginning to bet that the Fed will move even quicker to cut rates — possibly before the central bank’s next meeting in mid-September.

A mid-meeting rate-cut would be a highly unusual move from the Fed, which largely refrains from making cuts between meetings unless the US economy is rapidly deteriorating. But even without a mid-meeting cut, this recent episode is sure to have caught the Fed’s attention, chief US economist at GlobalData TS Lombard Steven Blitz tells the Wall Street Journal. “The markets are speaking to the Fed. They’re telling the Fed, ‘You’re too tight, and no, you can’t presume that everything is going to roll along merrily while you take the time to cut.’”

MARKETS THIS MORNING-

Asian markets are mostly in the green in early trading this morning, with the Nikkei and Kospi the biggest gainers, up 3.4% and 2.4%, respectively.

THE CLOSING BELL-

The ADX rose 1.2% yesterday on turnover of AED 1.2 bn. The index is down 5.2% YTD.

In the green: Gulf Medical Projects Company (+8%), Ghitha Holding (+6.2%) and Al Dar Properties (+6.1%).

In the red: Response Plus Holding (-4.2%), National Bank of Umm Al Qaiwain (-4.1%) and National Marine Dredging (-3.6%).

Over on the DFM, rose 2.3% on turnover of 718.4 mn. Meanwhile Nasdaq Dubai rose 2.9%