Saturday, November 23, 2024
As a general rule, we are disinclined to monocausal explanations of economic or financial developments. The economy and markets are complex, chaotic systems that are influenced by and that influence a wide range of factors.
But we’re human and like most people, we get swept away by the news and often by the narrative that surrounds it.
The selloff in stocks that took place on Friday and Monday came as a result of the disappointing Jobs Report, the activation of the Sahm Rule and fears that the economy was slipping into recession. Certainly, those were and are factors. But a 4.3% unemployment rate is not awful, and the economy has been slowing all year.
Perhaps another explanation is in order. And perhaps that explanation is the unwinding of the Carry Trade.
Late last week, after decades of an accommodative monetary policy and interest rates that were indistinguishable from zero, the Japanese Central Bank raised rates. There is much that could be said about such a policy and how it is so destructive. It is also, by the way, the precise policy that much of the political class encourages upon the US Central Bank.
But when interest rates are artificially low, as they have been for a very long time in Japan, it encourages a kind of arbitrage. Money is fungible. One could borrow money in Japan at a very low interest rate, by selling Japanese government bonds and lend it to the US government, at an artificially high interest rate, by buying US government bonds and pocket the difference.
Or, if your risk profile permits, by buying US stocks.
When Japan raised rates, the calculus changed and, in some cases, the Carry Trade had to be unwound. In some cases, that meant selling US stocks.
Again, there are many factors.
We honestly and sincerely wish politicians and governments would just stay out of this stuff. Markets are imperfect but money markets and bond markets are deep, wide, and liquid. There is little chance that all the bureaus in the world will ever do anything other than more harm than good.
Had it come at any other time than after three consecutive days of dramatic losses, that saw the S&P lose nearly eight percent of its value, yesterday would have been a day to celebrate. As it stands, we’ll take the win and will have to wait and see.
Interest rates were up across the board on Tuesday and sharply in some cases. That makes sense given how far they’ve fallen in recent days.
Thirty-eight companies reported second-quarter earnings during the day on Tuesday, eleven missed their earnings targets and fifteen missed on the top line. That’s more misses than we’d like to see.
Nothing on the economic calendar on Tuesday, and nothing due out today either.
Tomorrow initial and continuing claims for unemployment will be released, which takes on an increased significance given the weaker than expected jobs report on Friday.
We also expect the Atlanta Fed’s GDP Now report which has been hinting at a fairly strong third quarter. We shall see.
Other than that, we’ll be watching to see if the lack of economic news or market moving earnings reports enables the markets to regain their footing.
We'll be watching, so all you’ve got to do is keep it right here on the Buzz.
