August began with sharp sell-off in equity markets as investors grew increasingly concerned about the rising risk of a US recession. The downturn was exacerbated by the unwinding of several popular trades, including selling volatility protection, leveraging cheap Japanese yen to invest elsewhere, and betting heavily on the AI boom through the Magnificent Seven stocks.
In the midst of this market turmoil, expectations for US interest rate cuts surged, leading to a rally in bonds that resulted in lower yields. There were even calls for an emergency rate cut. Fortunately, the equity market sell-off was brief, as US economic data remains fairly robust. Consumer spending is healthy, though households are more cautious and price conscious. The labour market has cooled, with hiring slowing but without a notable increase in layoffs. Corporate profits have not declined to the extent that would necessitate widespread job cuts. So, while the US economy is expected to slow from the strong growth seen in the first half of the year, this does not imply a collapse.