LGT Navigator

Fears of recession shake markets - ISM index points to slowdown in US economy

On Wall Street and in Asia, fears of a global recession led to sharp falls in stock markets. In Tokyo, indices fell by as much as 5% and in New York the Nasdaq index was down around 2.5%. The trigger was not the Fed's interest rate decision, but a much weaker than expected ISM industrial index, which signalled a slowdown in the US economy. Prior to this, the Bank of England had cut its key interest rate for the first time since the beginning of 2020, and the Federal Reserve had hinted at a first easing in September. After the three major monetary policy decisions - the Bank of Japan raised its key interest rate on Wednesday - the focus today will be on the monthly US employment report. 

Date
Author
Alessandro Fezzi, LGT Research Content & Publications
Reading time
5 minutes

Negative market data
© Shutterstock

On the Asian bourses, stock indices fell sharply in some cases on Friday. In Tokyo, the Nikkei 225 and the Topix lost almost 5% on recession fears. In Seoul, the Kospi fell 3.6% and the small cap Kosdaq fell 3.5%. Australia's S&P/ASX 200 was down around 2.1%, retreating from Thursday's all-time high. Hong Kong's Hang Seng Index fell 2.3%, while mainland China's CSI 300 recorded the smallest loss in Asia, falling around 0.7%. With official sentiment indicators for the Chinese economy already weak in the first half of the year, the Caixin industrial sentiment barometer has now fallen from 51.8 to 49.8 points, signalling a slowdown in economic activity. While the official PMI is used by the National Bureau of Statistics to analyse large state-owned enterprises, the Caixin focuses on smaller and export-oriented companies.

Sudden change in sentiment

On the New York Stock Exchange on Thursday, a surprisingly weak reading in the monthly US manufacturing survey sparked recession fears and turned the mood of the stock market. The Dow Jones Industrial closed 1.2% lower at 40,347.97 and the S&P 500 fell just under 1.4% to 5446.68. The Nasdaq 100 lost around 2.4%. At the start of trading, all indices were still well in positive territory, benefiting from the prospect of the Fed easing interest rates in the near future, better than expected quarterly figures and a confident outlook from Facebook's parent company Meta.

ISM US industrial barometer falls sharply

Signs of a slowdown in the US economy are also increasing, as confirmed by the latest edition of the Institute for Supply Management (ISM) purchasing managers' index. The index fell surprisingly sharply to 46.8 points in July from 48.5 the previous month. The consensus was for an improvement to 48.8. The sub-indicator for employment trends deteriorated particularly sharply.

In the bond market, the yield on ten-year US Treasuries fell below 4% for the first time since February and currently stands at 3.96%.

Bank of England cuts interest rates for the first time in over four years

The Bank of England cut its key interest rate by 25 basis points to 5.0% on Thursday. Previously, the UK's monetary authorities had left interest rates unchanged for seven consecutive meetings. This time, five members of the Monetary Policy Committee voted for a cut and four voted against. The BoE was cautious in its outlook, with Governor Andrew Bailey stressing that interest rates should not be cut too quickly to ensure that inflation remains low. Following the decision, UK government bonds and the London Stock Exchange rallied.

Fed signals rate easing in September

Although the US Federal Reserve left its key interest rate unchanged at a range of 5.25% to 5.5%, it hinted at an initial easing at its next meeting on 18 September. Fed Chairman Jerome Powell stressed that a possible rate cut had already been discussed. However, he also pointed out that this would depend on further economic data. US inflation has recently slowed, giving the Fed more room to cut rates.

US jobs report in focus

The monthly report on employment in the world's largest economy (14:30 CET) will be closely watched by the capital markets and especially by the US Federal Reserve. The report from employment services provider ADP provided a preview. According to the report, fewer private sector jobs were created in the US in July than expected. Compared to the previous month, 122,000 new jobs were created, while economists had expected an increase of 150,000.

Eurozone inflation up again 

Consumer prices in the euro area surprisingly rose again in July to 2.6% from 2.5% in June. Economists had expected the inflation rate to remain unchanged. Core inflation, which excludes volatile energy and food prices, was unchanged at 2.9% last month (consensus 2.8%). Services inflation was 4% in July, slightly below the 4.1% recorded in the previous month. It remains to be seen whether the latest inflation data will influence the ECB's stance on further interest rate easing. As is well known, the ECB recently left its key interest rate unchanged after deciding to ease monetary policy in June.

Corporate and macroeconomic calendars

Corporate news in focus: Quarterly figures from Axa, Linde, Exxon Mobil, Chevron.

Economic data in focus: Swiss Consumer Price Index, Swiss Manufacturing Purchasing Managers’ Index, US nonfarm payrolls, US factory orders, US durable goods orders.

LGT helps you make informed investment decisions

Global economic and market trends at a glance

You can also follow us on Facebook or LinkedIn – or visit Insights and discover interesting background articles. If you have questions, a consultant from the bank will be happy to help you.

Imprint
Publisher: LGT Bank (Switzerland) Ltd., Glärnischstrasse 36, CH-8027 Zurich
Editor: Alessandro Fezzi
Source: LGT Bank (Switzerland) Ltd.

Contact us