In the crucible of global finance last week, the Bank of Japan's bold policy adjustments met the Federal Reserve's recession optimism, with the looming US labor data release adding to the suspense. All the while, Fitch's US debt downgrade underscored the domestic political challenges rippling out to the world economy. Let's dive deeper into these high-stakes events.
Overview
Rate decisions last week came in as expected. Bank of Japan’s loosening of its yield curve control to allow another 0.5% of movement was the biggest surprise but tempered by strong words that Japan will not be straying from their ultra-lose policy. Japanese inflation staying above its target of 2% despite a record drop in population suggests that inflation may be far stickier than many would like to hope.
In contrast, in their rates decision press conference, the Feds announced that they are no longer expecting a recession, a call that economists at Bank of America are in agreement with. This is in contrast to voices from JP Morgan and Vanguard which continue to insist a recession is coming. The risk is that the Feds will overestimate the resilience of the economy and end up over-tightening. Strong US data has contrasted with weak data globally, for instance from the UK housing market this week in painting different pictures on just how health global economies are.
In other news, Fitch has downgraded the US debt to AA+ from AAA following S&P, which has done so in the last debt crisis during Obama’s tenure. The news did not move markets as the information was priced in from months before. However, this is a reflection of a growing question mark over the ability of the US government to meet its obligations and function efficiently with a divided government.
The major upcoming calendar event is US labour data on Friday. Expect it to be closely watched as a canary on just how resilient the US economy is.
Upcoming Calendar Events
- US labour data (Aug 4)
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