A series of economic data that fell short of expectations has led to the worst performance in the US stock market since the regional bank crisis in 2023, intensifying market unease and further increasing the likelihood of an unexpected rate cut in September.

US stocks plummet, US Treasury yields end inversion

After the release of the US non-farm data for August, the US stock market experienced significant volatility. On September 6th, the S&P 500 index fell by 1.7%, with a weekly drop of 4.2%, marking the worst performance since March 2023.

Technology stocks were severely impacted, with the Nasdaq index falling by 5.8%, recording the largest single-week decline since January 2022. The Nasdaq 100 index fell by 5.89%, marking the largest single-week drop since November 2022; semiconductor stocks plummeted, with Nvidia falling nearly 14% in a week.

European stock markets were also affected, with the Stoxx Europe 600 index, Paris CAC 40 index, and London FTSE 100 index all experiencing declines, while Japanese and Chinese stock markets showed weakness.

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The commodity market was also influenced by expectations of an economic slowdown. In the crude oil market, Brent crude prices once fell to $70 per barrel, reaching the lowest level in nearly three years; the weekly drop reached 7.1%. Copper prices also continued to fall due to weak demand, further confirming the reality of weak global economic growth.

Although OPEC recently postponed its plan to increase daily oil supplies by 180,000 barrels in October and November, this decision was not enough to stop the sharp decline in crude oil prices.

In the bond market, as rate cuts approach, the two-year US Treasury yield has fallen to 3.66%, hitting a two-year low. The 10-year Treasury yield fell to 3.72%, ending a 26-month inversion of the yield curve.

This change is significant for the financial market. An inverted yield curve is typically seen as a warning signal for an economic recession, and the end of inversion implies that the economic outlook may be undergoing a significant shift. Historically, the end of inversion often precedes an economic recession.

Many economists and market analysts believe that the normalization of the yield curve from inversion means that the accumulated economic risks have begun to materialize, increasing downward economic pressure, and the US economy may face significant challenges in the short term.Interest Rate Cut Expectations Shift

Recently, several high-ranking Federal Reserve officials have spoken out, further intensifying market unease.

The dovish remarks from Federal Reserve Governor Christopher Waller and New York Fed President John Williams have reinforced market expectations for the possibility of an interest rate cut. Williams pointed out that the Federal Reserve has made progress in achieving price stability and maximum employment goals, and the current economic situation provides a reasonable basis for a rate cut.

Waller expressed support for a rate cut and is open to an earlier reduction. He noted that there are some downside risks in the U.S. job market, but the overall situation has not deteriorated, and he does not believe that the U.S. economy is heading towards a recession. Similar to Waller, Williams believes that the Federal Reserve has made significant progress in stabilizing prices and achieving employment targets, and that a rate cut is appropriate at present.

The market reacted cautiously, worried about whether the Federal Reserve can accurately respond at the right pace. After the release of the non-farm employment data, pessimism took the lead, and the probability of a 50 basis point rate cut by the Federal Reserve in September rose from 40% to 50%. Subsequently, the market calmed down and began to reassess the officials' speeches, with expectations falling back to 30%.

Analysts at JPMorgan Chase pointed out that if future CPI data shows a continued decline in inflation over the next few months, the Federal Reserve may choose a more moderate pace of rate cuts. However, if inflation is stubborn or rebounds, the Federal Reserve's policy path may become more complex, and it may even pause the rate cut plan.

Analysts at Bank of America believe that although the job market is weak, the Federal Reserve still needs to rely on inflation data to adjust its policy stance. If inflation continues to approach the 2% target, the Federal Reserve may adopt a more aggressive rate cut strategy to ensure that economic growth is not suppressed by tight policies.

In a report on September 6, Goldman Sachs pointed out that senior Federal Reserve officials are inclined to cut rates by 25 basis points in September. The speeches by Williams and Waller indicate that if the labor market further deteriorates, the Federal Reserve may consider a 50 basis point rate cut at subsequent meetings.

Soft Landing Expected

Market concerns about a U.S. economic recession have never been ruled out. Zhongtai Securities believes that this year, U.S. stocks have repeatedly hit new highs, and investors worry that the U.S. economy is at the "end of its strength," and any signs suggesting an economic recession may be magnified.However, the market views the August non-farm employment data as "uncertain," lacking clear guidance and reducing the credibility of the data. Zhongtai Securities believes that investors should pay more attention to the upcoming August inflation data, which will have a more direct impact on the September interest rate decision. Due to the frequent adjustments in non-farm data and the statements of Federal Reserve officials, the trend in inflation is the key factor in determining the magnitude of interest rate cuts.

Institutions believe that the US economy has a chance for a "soft landing." CICC believes that since the second quarter, US inflation has slowed down, and economic growth has remained strong, increasing the possibility of a "soft landing." Generally, central banks raise interest rates to curb inflation, but this can lead to excessive credit tightening and subsequently trigger an economic recession. However, this time the situation is different, as improvements on the supply side help alleviate inflation without harming the economy, creating conditions for a "soft landing." There are four key supply factors worth paying attention to: First, the recovery of the supply chain reduces the price pressure on tradable goods; second, China exports relatively cheaper physical resources to the United States, reducing import costs; third, immigration inflows increase labor supply, alleviating labor shortages and wage pressure; fourth, increased productivity reduces unit labor costs, easing the pressure on businesses to raise prices due to rising production costs. CICC expects the Federal Reserve to adopt a gradual interest rate reduction, and it may even be a "stop-and-go" approach.

CICC points out that contrary to the market's intuitive feeling, the performance of US stocks in the second quarter did not slow down significantly, and overall, it is still accelerating. However, market concerns cannot be ignored, such as the slowdown in the growth rate of technology companies, which become a "source of volatility" under high valuations and with many profit-taking positions; the slowdown in low-end consumption due to residents' pursuit of cost-effectiveness; and the bottoming out of cyclical sectors such as real estate and manufacturing.