US inflation trends, yen unwinding and a surprising sector winner in Biden vs Trump

Market braces for Fed rate cuts amid sharp decline in US job growth

What the chart shows 

This chart shows the market expectations for the Federal Funds Rate (FFR) – the interest rate banks charge each other for overnight loans – and how they have evolved from the start of July and the start of August until today. We can see that market expectations for the FFR by the end of this year have notably declined, from just over 4% at the start of July to about 3.3% at the start of August and today.

Behind the data 

A sharp slowdown in the US jobs market has triggered global stock market volatility and fueled speculation that the Federal Reserve (Fed) might cut interest rates before its next scheduled meeting in September. While some analysts anticipate a half-percentage-point rate cut at the September meeting, they believe an emergency inter-meeting rate cut is unlikely, as it could exacerbate market uncertainty and panic.

Later stages of unemployment-inflation trade-offs

What the chart shows 

This chart depicts the US Beveridge Curve, which typically shows an inverse relationship between the unemployment rate and the job openings rate, and the Phillips Curve, which illustrates the relationship between unemployment and inflation – where lower unemployment is associated with higher inflation and vice versa. It compares pre- and post-COVID conditions using scatter plots and regression analyses.

Behind the data 

Before the COVID pandemic, but after the Global Financial Crisis, the US Beveridge and Phillips curves were {{nofollow}}relatively flat in a low-interest-rate environment. Following the pandemic, these curves {{nofollow}}steepened, reflecting a tight labor market with a higher job openings rate compared to pre-pandemic levels, while inflation shifted upward and stayed above the 2% target.

If these steeper relationships persist, the job openings rate and inflation could continue to normalize downward, with a gradual rise in the jobless rate that remains moderate. However, in the later stages of an economic slowdown, there may be non-linear changes, potentially leading to a scenario where the job openings and inflation decrease more slowly while the unemployment rate rises more sharply.

US core inflation exceeds developed markets

What the chart shows 

The chart compares US core inflation with the median and percentile ranges of developed market (DM) peers, and US-peer inflation differential.

Behind the data 

Following the COVID crisis – likely due to more substantial fiscal and monetary measures – US core inflation rose faster than DM peers, widening the inflation gap beyond historical norms. However, since 2023, this inflation differential has begun to normalize.

Recently, both US and DM-peer core inflation have remained above the 2% standard, with the US exceeding DM peers moderately. Given the relatively higher core inflation, the Fed might not adopt a more dovish stance compared to its peers.

Chinese new loans at multi-year lows

What the chart shows

This chart illustrates the seasonality of China’s newly increased loans, comparing 2024 loan levels to those in 2020-2023, as well as to pre-COVID norms from 2010-2019. It highlights how loan issuance stacks up with a baseline set at January's levels (Jan=100).

Behind the data

New yuan loans by Chinese commercial banks in July were {{nofollow}}lower than anticipated, reaching a multi-year low. In 2024, loan issuance has remained relatively subdued compared to recent years and pre-COVID standards, highlighting ongoing economic challenges in China, particularly in areas such as consumer spending and real estate. This may prompt the People’s Bank of China (PBoC) to provide additional monetary support to stimulate credit activity.

Looking ahead, as global monetary policies become more accommodative, the PBoC may find it more favorable to ease its policy further.

USDJPY falls below key average amid yen carry trade unwinding

What the chart shows

This chart compares USDJPY deviations from its one-year moving average with net JPY futures positions – held by non-commercial traders (top panel) or leveraged funds (bottom panel) – from January 2021 to the present. 

Behind the data 

Since 2021, as markets began pricing in the Fed’s tightening cycle amid the Bank of Japan’s (BoJ) ultra-accommodative stance, speculative positions of net JPY shorts – whether held by non-commercial traders or leveraged funds – have steadily accumulated. During this period, USDJPY has deviated to the upside from its one-year moving average for most of the time.

However, following a {{nofollow}}pessimistic US labor report for July, expectations for more significant Fed rate cuts have weighed on the US-Japan interest rate differentials, leading to pressure on the carry trade unwinding and weaking of the yen.

While there remains {{nofollow}}some room for further unwinding of cumulative JPY short positions (indicated by the negative green and purple areas in the chart), USDJPY has recently flipped below its one-year moving average. This may suggest a potential shift in market dynamics.

Biden outshines Trump in energy sector gains despite market perceptions 

What the chart shows

This chart displays S&P 500 sector performance during the tenures of Presidents Trump and Biden, measuring from their respective election dates to the end of July in their fourth year in office.

Behind the data

Trump’s presidential campaigns have been perceived as more stock-friendly, with policies such as ‘{{nofollow}}Drill, baby, drill’ and {{nofollow}}less restrictive banking regulations. However, as the chart shows, the energy and financial sectors actually performed significantly better under Biden than under Trump. 

Performance differences in other sectors are less pronounced, suggesting that factors beyond political and administrative policies – such as monetary policy, economic cycles, inflation shifts and global geopolitics – play a crucial role.

The stark contrast in energy sector performance could be attributed to {{nofollow}}factors like increased oil and natural gas production, driven by post-pandemic recovery and Russia’s invasion of Ukraine, as well as Trump’s mixed stance on clean energy. 

Looking ahead, stock and sector performance may continue to be influenced by these broader forces, and selective attention to policies will be essential.