And relax, at least for now

After an eventful week, a sense of calm has descended over global stock markets. As of this morning, the S&P 500 is only modestly down this week, recovering much of the losses from earlier in the week. The sharp rise in the Japanese Yen that helped spark the volatility has subsided, and the latest employment report, which came in better than analysts’ forecasts, helped soothe the recession fears. As Corporal Jones used to implore Mr Mainwaring, these are not times to panic but to embrace and enjoy.

One also learns things; I learned this week about something called the Sahm law. I was ignorant of it until it became a hot topic. When the three-month moving average of the national unemployment rate is 0.5 percentage points or more above its low over the prior twelve months, we are in the early months of recession. This is what last week’s employment report signalled. It’s as simple as that, apparently. All this adds to the sense of panic.

The Vix index fear index, which climbed at one point to its highest level since the pandemic, has fallen back closer to its historical average but remains well above the lows of a few weeks ago. Risk appetite has collapsed in the past few days, according to the Morgan Stanley risk demand index. Which is all perfectly normal at such times.

Yesterday, John Authers wrote in his daily article, yes, I do quote him often, about the Fed being bullied into decisions by the market. Are the Fed being forced into a rate cut by the stock market throwing a tantrum, very possibly? There was even some talk this week of an emergency meeting, which would have definitely thrown the cat amongst the pigeons, as they say. What has actually happened is several members of the Fed have come out in the media and remained resilient in their view that inflation rates are not yet back to target and remain vigilant about cutting rates. Will the central bank be too slow to cut rates, just as they were too slow to raise them? More than likely is the answer. Will they cut in September, again, more than likely? Will the Fed and the ECB join them and go again? Next week, we will have a raft of US inflation data; we shall see how heavily that influences investor sentiment.