Chanana also says even after the Fed starts cutting rates, in most cycles, recessions come after the first rate cut. So, one should be cautious and not immediately start buying the dips right away, because there is an uncertainty that every time the US economy slows down, it first appears that we are entering a soft landing but in reality, soft landings have been very difficult to achieve.
There is debate over whether there is a genuine global slowdown or not because this morning, the Japanese GDP data does not look very impressive. The US jobs data also sent concerns around the world. What is your take on how global growth is panning out right now?
Charu Chanana: That remains the big question. Let me start with the US first. We have seen weeks and weeks of mixed data. Some sectors of the US economy are showing a slowdown, and impact from high interest rates. But there have been other sectors in the US economy that have been extremely resilient as well. As a result, some Fed surveys have been hinting at that slowdown, but other hard data are still holding up well on the margin and that is the confusing message that we got from the jobs reports as well on Friday. Again, I would not rule out a slowdown here.
Of course, the economy is slowing down. The impact of high interest rates is filtering into more and more sections of society. But, it does not look like a complete collapse is coming our way pretty quickly. When you talk about Japan as well, it has a lot to do with consumer spending there, which has picked up a little bit on the back of wage growth that they have seen there. But at the same time, inflation is also rising. So, it is not an easy decision for Japanese consumers. And of course, then Japan is pretty vulnerable to what happens in the global cycle as well. There they see the impact coming through again.
So, overall, the message here is pretty clear that we are going into a slowdown. What we need to watch out for is whether that slowdown comes abruptly, which is what puts the markets in a more difficult position. But if it is a more measured slowdown, as it appears to be right now, and the Fed stands ready to take action and respond to it, then it could remain in that comfortable position as well.
Are we in for a reversal in financial assets, because for the first time after the Ukraine crisis, we have seen an extended selloff in across-the-board asset classes?
Charu Chanana: I would honestly not be looking at buying the dips right away, because there is still that uncertainty that every time the US economy slows down, it first appears that we are entering a soft landing. But eventually, in the past, we have seen that soft landings have been very difficult to achieve.
Even after the Fed starts cutting rates, in most cycles, recessions come after the first rate cut. So, at this time, I think I would be cautious. What is also important to note is how that artificial intelligence theme plays out from here, because that has been driving the US equity markets in particular over the last many months now. We see a little bit of a pullback in that spending on artificial intelligence projects because certainly there have been some questions around that, because they are not translating into bottom-line gains as of now. If we do see that pullback in spending coming through, that can have huge implications for the overall economy as well. So, I would certainly be a little bit more watchful. I do think we could get a little bit more of a sell-off here. In the commodity prices, the China story is playing a huge part, with the reversal not coming through in any of the sections of the Chinese economy. So, we should be a little bit cautious at this stage.
What is your outlook on the US dollar and the strength that we have been seeing here?
Charu Chanana: The US dollar has been a little bit responsive to those expectations around the Fed starting its policy easing as early as next week and we have seen some pressure built up there. If you look at the speculative positioning in the US dollar as well, that turned into a net short over the last two weeks of data as well. So, there are some reasons to be concerned. But I would not be looking at a sustained downturn in the US dollar as of now, because as much as we see those numbers around the US starting to indicate a slowdown, which is suggesting that the Fed will start cutting rates, it is very hard to find an alternate destination when you want to be short US dollars.
If the US economy is in trouble, the Eurozone economy is in an even tougher situation. We just talked about Japan as well. So, it looks like the flows that move out of the US dollar will find it very difficult to find an alternate destination. On top of it, the US elections are in focus which continues to suggest that we could see support coming through for the US dollar as well. So, I am not looking for a sustained downturn here.
Are you are in the 25 bps cut camp or the 50 bps for the Fed meeting on September 17, 18?
Charu Chanana: My bias is towards the 25 bps cut as of now, because like I said, there is no reason to panic. If the Fed was to go for a 50 basis point rate cut right away, it could spell some panic. I would think they would move 25, come up with a very dovish language, and open the room for a 50 bps move in November or December if needed. Overall, it would be a 25 bps cut with a very dovish rhetoric, that would make up for not going for that 50 bps cut now.