It's too early for a significant rate cut? Deutsche Bank does not see "widespread panic"!

After experiencing the worst week in the US stock market this year, there was a rebound on Monday — and a strategist at Deutsche Bank believes that investors should not overly exaggerate concerns about economic slowdown, and the recent market volatility may be unnecessary.

Deutsche Bank macro strategist Henry Allen said in a report on Monday: "We should not exaggerate the severity of the situation, nor should we exaggerate the market's decline last week, which was mainly driven by a small number of stocks."

The S&P 500 index fell by 4.3% in the first week of September, but Allen pointed out that this decline was led by a few large tech stocks. FactSet data shows that the group of companies known as the "Fabulous Seven" fell by 5.4% last week.

Allen said: "Even before this sell-off, we already knew that September is a seasonally weak month, and as the US election approaches, the stock market tends to struggle."

Furthermore, a closer look at US labor market data reveals that the economic situation is not as pessimistic as some initial job reports may suggest.

For example, in the week ending August 31, the number of Americans applying for unemployment benefits fell slightly to 227,000, hitting an eight-week low. The Deutsche Bank strategist stated that a more timely labor market indicator — initial jobless claims on a weekly basis — has declined in recent weeks. He also added that the four-week average is currently at a 12-week low of 230,000 people and has been "significantly below" the peak in mid-2023.

Allen said, more importantly, the expectation that the Federal Reserve will begin cutting interest rates this month "has started to have an impact," even before the actual rate cut by the Fed, "the prospect of rate cuts helps alleviate overall financial conditions tightening."

For instance, the yield on the 10-year Treasury bond was 3.71% on Monday afternoon, hovering near the lowest levels since June 2023.

The effects of lower yields are also beginning to seep into the real economy. Data released by Freddie Mac shows that as of September 5, the average rate for a 30-year fixed-rate mortgage was 6.35%. This rate remained unchanged from the previous week but is significantly lower than 7.12% a year ago.

Allen wrote that it is worth noting that most central banks have only cut interest rates by 25 basis points in the past few months, indicating that there does not seem to be "widespread panic" in the global economy at the moment.

He said: "Although there is speculation that the Fed may cut rates by 50 basis points, it is worth noting that other developed economies' central banks have not cut rates at such a pace. The fact that central banks like the European Central Bank have only cut rates by 25 basis points suggests that they do not currently see a need for rapid adjustments."

According to the CME Group's FedWatch Tool, despite the lower-than-expected increase in non-farm payrolls announced last Friday, federal funds futures traders on Monday believed there was a 73% chance that the Fed would cut rates by 25 basis points at the September 17-18 meeting. However, the August Consumer Price Index released on Wednesday may ultimately determine whether policymakers will take a larger 50 basis point rate cut In addition, Allen said, given the poor track record of these leading economic indicators in the current "post-pandemic economic cycle," it is sometimes difficult to trust them.

He wrote: "From an economist's perspective, one of the difficulties of this cycle is that traditional leading indicators have not performed as expected."

Allen added: "There is much debate about why this is the case, and whether the post-pandemic economy is somewhat different. For example, consumers may be cushioned by excess savings accumulated during the pandemic. But whatever the reason, the shift in economic behavior relative to previous cycles makes relying on these leading indicators more challenging."