"September 50 basis point rate cut vs global economic recovery" Two major expectations coexist, and September's non-farm payrolls will falsify "one of the two"
There are two contradictory expectations in the market at the same time— the Federal Reserve will significantly cut interest rates by 50 basis points in September, and the global economy is heading towards recovery. Nomura stated that the next U.S. employment report will be the key "arbiter" of these conflicting expectations. If the employment data is weak, expectations for economic recovery will cool, and funds may flow into bonds and technology stocks; if the data is strong, expectations for interest rate cuts will weaken, and funds may shift towards cyclical stocks
In the current global financial market, two vastly different grand narratives are colliding fiercely.
According to the news from Chasing Wind Trading Desk, on August 14, Nomura Securities' research report stated that the market is simultaneously digesting two seemingly contradictory expectations: on one hand, the Federal Reserve is about to adopt aggressive easing policies, while on the other hand, the global economy is steadily moving towards recovery.
These two expectations cannot coexist in the long term, and the next U.S. employment report, which is about to be released, is likely to become a key catalyst that breaks the current fragile balance in the market. The next U.S. non-farm payroll report will be released on September 5 (Friday).
Contradictory Signals: Rate Cut Expectations and Risk Appetite Coexisting
Analyst Naka Matsuzawa observed that market behavior is full of contradictions.
According to data from the Chicago Mercantile Exchange's FedWatch tool, the market prices imply a 6% probability of the Federal Reserve cutting rates by 50 basis points at the September meeting. The report pointed out that some individuals, including U.S. Treasury Secretary Janet Yellen, have also begun to publicly call for a 50 basis point rate cut. This expectation has driven the U.S. dollar to weaken across the board.
However, at the same time, the U.S. stock market has set historical highs for two consecutive days. More notably, the market's rise is not driven by a few tech giants but shows broader signs of recovery. In particular, economically sensitive small and mid-cap stocks (represented by the Russell 2000 index) and consumer-related sectors have performed strongly, emerging market stocks have also remained robust, and Bitcoin prices have reached historical highs. The report believes this reflects an increasing expectation among market participants for macroeconomic improvement.
This situation of "betting on easing with one hand and betting on growth with the other" has filled the market with uncertainty. Matsuzawa stated in the report that the market pricing for a significant rate cut resembles a form of "insurance" against potential downside risks in economic data. Ultimately, whether the narrative of economic recovery prevails or the concerns of recession solidify the expectations for rate cuts may soon be revealed.
Decisive Moment: An Employment Report Determines Asset Flows
The core viewpoint of the report is that the market cannot always "have it both ways." The next U.S. employment report will force investors to choose between the two scenarios of "rate cuts" and "recovery," and may trigger significant capital rotation.
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Scenario One: Employment Report Unexpectedly Weak If the data falls short of expectations, the narrative of global economic recovery will "lose credibility." At that time, the market's expectations for a significant rate cut by the Federal Reserve will be solidified, and funds may quickly withdraw from cyclical assets and flow back into bonds and tech stocks, which will once again become the leading sectors in the market.
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Scenario Two: Employment Report Performs Steadily If the data confirms that the economy remains strong, then the market's expectations for "excessive" rate cuts will quickly dissipate. In this case, a noticeable rotation of funds may occur, shifting from previously high-performing tech stocks to cyclical stocks that are more closely tied to economic recovery The previous non-farm payroll report was quite bleak. Wallstreetcn previously reported that the U.S. added only 73,000 jobs in July, far below expectations, and the data for the previous two months was significantly revised down by 258,000.
Japanese Assets May Become the "Potential Winners" of Recovery Expectations
For global investors, the report specifically pointed out potential opportunities in the Japanese market.
The report's analysis found a high correlation between the Tokyo Stock Exchange Index (TOPIX) priced in U.S. dollars and the U.S. Russell 2000 small-cap index. Recently, the Russell 2000 index has reached a new high since the beginning of the year, approaching historical highs, driven by both liquidity easing and expectations of macroeconomic improvement.
Therefore, the report emphasized that if expectations for global economic recovery ultimately prevail, the Japanese stock market is likely to become a "strong-performing asset." Additionally, the report mentioned that compared to U.S. tech stocks, Japanese tech stocks have stronger cyclical properties and relatively lagging valuations, which are expected to be corrected under the expectations of global economic recovery. Meanwhile, in this environment, the Japanese bond market may experience a "bear flattening" trend.
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