We were so close! The economic floor routine to stick a soft landing—taming inflation with high rates without causing a recession—seemed on track and within reach and expectations were running high and then a few things happened in rapid succession:
BoJ hiked their rate to 0.25% on July 31st. It was the second rate hike this year, and the official reason was that the inflation and economy were on track to sustain it.
Coincidentally, it also strengthened the Japanese yen against the US dollar which was sorely needed since propping up JPY was getting exhausting.
However, higher Japanese rates, a strengthened yen, and US rates about to come down is a 180-degree turn from 2024 so far and releasing that elastic band smarted. Traders sold (Japanese) stocks to buy yen, and that didn’t end well.
In another stock market, the tech companies that have been driving insane gains released quarterly earnings reports that were a teeny bit more muted and made the inherently worrisome traders wonder if the bubble was ever for real.
Also, the Fed said that they would keep waiting for even signier signs that the economy has slowed down enough before they start cutting rates.
As if summoned, then the US July unemployment rate jumped to 4.3%. Still not a lot, but a lot more than it has been over the past year, and in fact so much more that it triggered the Sahm-rule (see fact box) that says we are now in the early stages of a recession.
There is nothing that causes panic as when you run into a crowded room and yell FIRE!
The Sahm Rule
The Sahm rule, which is named after the economist Claudia Sahm, states that
When the three-month moving average of the national unemployment rate is 0.5 percentage point or more above its low over the prior twelve months, we are in the early months of recession.
Dr. Sahm herself says the rule is not a law of nature or an indicator, but an empirical regularity.
The volatility index (VIX), also known as the Fear Gauge spiked, and $6.4 trillion stock value was wiped out. Some called for the Fed to make an emergency rate cut, and the Fed had to come out and say that they don’t act on-demand—and certainly not to the stock market—so, maybe just take a chill pill.
Since Monday, August 5th, that was one of the Mondayest Mondays that ever Mondayed, tempers have tempered, everyone has taken a deep breath, the markets have stabilized, and a lot has been regained.
What remains is the real and also philosophical debate about what constitutes a soft landing as opposed to a recession. As Greg Ip of WSJ wrote this week: To decide if it’s raining, it’s better to stand outside than count umbrellas.
Regitze Ladekarl, FRM, is FRG’s Director of Company Intelligence. She has 25-plus years of experience where finance meets technology.