Invesco: Market overly concerned about US economy entering recession, Fed may cut interest rates three times this year

According to the Zhishun Financial APP, Kristina Hooper, Chief Global Market Strategist at Invesco, has expressed her views on the sell-off in the US and Japanese markets. Invesco stated that due to economic growth below trend and continuing slowdown, their strategic indicators have shifted to defensive. However, the market is overly concerned about the US economy falling into a recession. Although the Fed's decision not to cut rates in July did increase the risk of an economic downturn, the labor market remains relatively strong. It is almost certain that the Fed will cut rates in September, and is likely to cut rates again in November and December. Currently, the World Interest Rate Probabilities estimates a 75% probability of a 50 basis point rate cut in September.

In July, the US non-farm payrolls added 114,000 jobs, far below the expected 175,000. The job additions for the previous two months were revised downward by 29,000. The unemployment rate rose significantly from 4.1% to 4.3%. The market is concerned that the Fed is taking too long to wait before starting rate cuts, leading to policy mistakes. Bond yields have dropped significantly. The market is starting to anticipate a 50 basis point rate cut by the Fed in September.

Invesco's basic scenario is that it is not too late for the Fed to start cutting rates now. If the Fed starts easing monetary policy in September, the US may avoid falling into an economic recession. US economic growth may accelerate again by the end of 2024 or early 2025.

Considering the shift to a conservative stance in strategic indicators, Invesco will adopt a cautious approach in the short term. However, Invesco's medium-term outlook is driven by policy responses, normalization of bond yield curves, and the resilience of the US economy. Therefore, in the long run, as in the past, the loose cycle should be unrelated to economic downturns and tend to favor risk assets.

The recent decline in Japanese stocks may be a "healthy breather" after the recent investment frenzy.

Regarding the sell-off in the Japanese market, Invesco points out that the recent sharp drop in the TOPIX index seems to be due to various factors. The appreciation of the yen is certainly one of them, and the Bank of Japan has signaled a tightening of monetary policy. With the central bank believing that inflation will likely remain at 2% in the long term, and holding a more optimistic view of future economic activity in Japan, more rate hikes may be seen later this year. It is believed that some closing trades or profit-taking sales are still ongoing. A rate hike by the Bank of Japan is a key event, and many expect the yen to further appreciate. In some past years, over half of the total sales of large Japanese stocks were settled in US dollars or other foreign currencies. Therefore, investors' concerns are not unfounded.

It is worth mentioning that Japanese bank stocks and financial stocks have fallen sharply. Normally, a rate hike by the Bank of Japan would benefit related industries (net interest margins improve). Japanese bank stocks have risen by over 40% this year (before the recent plunge), and many have prepared for the actions of the Bank of Japan. This may also be a market concern that if interest rates rise too quickly, their holdings of financial corporate bonds will face book losses.

Invesco believes that the recent decline in Japanese stocks may be a "healthy breather" after the recent investment frenzy. Moreover, considering that the Japanese economy still has long-term structural advantages, it is believed that the selling pressure is only temporary. **Japanese wage growth far exceeds recent historical levels, thereby driving domestic demand growth.

As for the Japanese yen, considering the possibility of multiple interest rate cuts by the Federal Reserve before the end of 2024, it is believed that the yen against the US dollar may continue to appreciate. Looking ahead, the future trend of the US dollar against the Japanese yen may depend more on the monetary policy of the Federal Reserve rather than the gradual actions of Japanese decision-makers. The historical correlation between the USD/JPY exchange rate and the TOPIX stock price index has always been quite high. However, it is not advisable to withdraw from the Japanese stock market at this point or take overly tactical actions regarding the yen, as this may miss out on what could be a structural bullish opportunity for Japan in the coming years