The sharp drop in July ISM PMI, is the "soft landing" of the United States gone?
The ISM PMI in July plummeted, with the real estate and manufacturing sectors most affected by interest rate sensitivity. It is important to differentiate between slowdown and recession, and to assess the depth of the decline and the impact of the Fed rate cuts. Rate cuts can repair interest rate-sensitive demand, but there are currently no clear signs of credit tightening. Before the rate cut, attention should be paid to assets, and after the rate cut, it is necessary to take a step ahead. Source: Kevin Strategic Research
- However, if the slowdown and recession are directly equated without distinction, it is easy to lead to excessive pessimism towards risk assets and excessive optimism towards safe-haven assets. Moreover, the term "recession" itself is not precise, lacking a unified measurement standard.
When comparing the "soft landing" of a slowdown with the "hard landing" of a recession, one needs to consider the depth of the decline and whether the Fed's rate cuts can "save the situation." There are generally two reasons for causing a recession: one is the impact of unexpected credit risks, and the other is when financing costs significantly exceed investment returns, leading to sustained suppression and credit contraction. Currently, there are no clear signs of this.
During the rate cut cycle in 2019 and earlier this year, the manufacturing PMI was at similar or even lower levels. Rate cuts or expected rate cuts led to a gradual improvement in financial conditions, and now the rapid decline in interest rates and potential future rate cuts also have a similar easing effect. Some interest rate-sensitive demands are gradually recovering, such as the earlier recovery in the real estate sector.
However, at this stage, there is no need to resist this trend from an asset perspective. We have always recommended that before the rate cut is realized, assets on the denominator side (such as US bonds, gold) can still be held with greater flexibility, while risk assets on the numerator side (such as US stocks, copper, etc.) may face pressure. This is also the typical "routine" of each rate cut trade, the same applies this time. However, the "special" aspect this time lies in the [pace], similar to 2019, after the rate cut is realized, this trade will gradually shift because it is not a recession-style rate cut, the magnitude is not large and the time is short, assets will also move ahead, so it is necessary to take a half step ahead.
Author: Liu Gang from CICC (SAC Practitioner Certificate Number: S0080512030003), Source: Kevin Strategy Research, Original Title: "[CICC Overseas] July ISM PMI Plunges, Is the 'Soft Landing' Gone?"