US workers’ fears, China deflation risks, global stocks

Taylor rule signals potential Fed rate cuts

What the chart shows

The above table illustrates scenarios for the Federal funds rate (FFR) based on the Taylor rule (1993), a traditional monetary policy reaction function that responds to inflation and output gaps, with the unemployment gap serving as a proxy through Okun’s law. The US inflation and unemployment rates analyzed in the chart range from 1.5 to 3.5% and 3.5% to 5.5%, respectively, with the shades of blue and red indicating possible rate adjustments.

Behind the data

With the Federal Reserve's (Fed) dual mandate of stable prices and maximum employment, the Taylor rule provides a valuable framework for justifying potential Fed decisions in the coming months and years under varying economic conditions.

Given the recent Personal Consumption Expenditures (PCE) inflation rate of 2.5-2.6%, and an unemployment rate of 4.2%, the Taylor rule suggests an FFR of  5.0-5.1%, implying the need for one to two 25-basis-point rate cuts. This aligns with market expectations of a 25-basis-point rate cut at the upcoming Federal Open Marketing Committee (FOMC) meeting on 17-18 September, lowering the FFR from 5.25-5.5% to 5.0-5.25%, with additional cuts anticipated in Q4 2024.

If inflation moderates by 0.5 percentage points, the Taylor rule points to a 4.2% FFR. If the jobless rate rises by 0.5 percentage points, the rule indicates a target of 4.5-4.6% FFR. Should inflation decline and unemployment increase by these margins, the rule suggests an FFR of 3.7-3.9%. These scenarios underscore the Fed’s probable paths depending on shifts in economic data, reinforcing the model’s usefulness in projecting policy responses.

Job security fears surge among US workers

What the chart shows

This chart presents recent findings from the New York Fed's labor market survey, highlighting  Americans' concerns about job security. The data is segmented by key demographic categories, with each displaying the percentage of employees fearing job loss. The column on the far right provides a visual context of the data distribution over time from 2014 to the present.

Behind the data

Recent disappointing nonfarm payroll figures have exacerbated anxieties around job security. The survey conducted by the New York Fed found that more than 4% of US employees currently fear losing their jobs, the highest level since 2014. The data reveals a notable gender disparity: 6.5% of women are worried about job loss compared to 2.5% of men, highlighting persistent gender inequality in the labor market.

The survey also identifies workers without higher education and those earning less than $60,000 per year as the most vulnerable groups, with heightened concerns about job security. These findings show the uneven impact of economic uncertainty across different demographics.

China faces deflationary risks amid investment hesitation

What the chart shows

This chart illustrates China's inflation trends from 2000 to the present using multiple measures, including the GDP deflator, headline Consumer Price Index (CPI), Producer Price Index (PPI), and the M1-M2 growth gap (which indicates changes in money supply dynamics to signal future inflationary pressures) leading by two quarters. The chart includes decade averages for the GDP deflator and CPI to provide historical context and highlight longer-term trends.

Behind the data

With slower economic growth trends and ongoing recovery challenges, China is experiencing inflation levels below historical norms. The decade averages of the Chinese GDP deflator and headline CPI have been trending downward, reflecting subdued price pressures across the economy.

In addition, the persistent negative M1-M2 growth gap since H2 2018 – where M1 represents readily accessible demand deposits and M2 includes less liquid short-term time deposits – suggests prolonged corporate reluctance to invest. This monetary dynamic may put downward pressure on inflation, as depicted by its positive relationship ahead of PPI, signaling that reduced liquidity and investment appetite can suppress producer prices over time.

Overall, these patterns highlight structural deflationary risks in China, pointing to challenges in reviving domestic demand and price stability.

‘September effect’ weighs on global stocks

What the chart shows

This heatmap depicts the seasonality of average monthly returns and the probabilities of positive returns for major global stock indices. Blue shades indicate a likelihood of more than 50% for positive returns and red shades indicate a probability of less than 50% to provide a clear visual representation of seasonal trends in stock market performance.

Behind the data

Concerns over the ‘September effect,' coupled with softening macroeconomic conditions globally, have triggered sell-offs in risk assets this month. Empirical evidence supports these concerns, as average seasonal returns and the probability of positive returns are typically lowest in September, often turning negative and falling below 50% across several major equity markets. This pattern highlights September as a consistently weak month for equities, reinforcing the 'September effect' as a pessimistic seasonal factor in the markets.

Balancing risk and reward: S&P 500 variants reveal winning strategies over time

What the chart shows

This chart offers insights into style investing by ranking variants of the S&P 500 index based on their Sharpe ratios, a key metric for evaluating risk-adjusted returns. This visualization highlights which index variants have historically delivered the highest returns relative to their risk levels, helping investors identify outperforming strategies over time.

Behind the data

Historically, growth stocks and the so-called Top 50 stocks, which represent some of the largest and most influential companies in the S&P 500, have consistently delivered strong performance due to their market dominance, strong financial results and broad investor appeal. In contrast, pure growth stocks – typically perceived as having exceptional potential for rapid expansion – have underperformed relative to these top-tier companies. This suggests that purely growth-focused stocks may require more selective investment strategies.

High-beta stocks, characterized by their greater volatility and higher risk, have generally achieved higher Sharpe ratios, reflecting strong performance during market upswings due to their heightened sensitivity to market movements.

However, in times of economic downturns or crises, such as in 2018 and 2022, low-volatility stocks have proven their worth. Despite offering lower overall returns, these stocks provide stability and downside protection, making them an attractive option for investors looking to minimize risk during turbulent market conditions.

FTSE 100 thrives amid moderate inflation

What the chart shows

This chart illustrates the year-over-year performance of the FTSE 100 under various employment and inflation scenarios, categorized into historical tertiles to provide a view of how the index performs across different economic conditions.

Behind the data

The FTSE 100 tends to perform better in environments with strong employment or moderate inflation. Recently, as inflation moderated around 2%, the index showed resilience amid weakening jobs. This underpins that moderate inflation can support equity performance, achieving average year-over-year growth of over 10% regardless of labor market situations. However, if inflation deviates significantly – either rising sharply or falling below moderate levels – the index’s performance could deteriorate, particularly in scenarios of low inflation combined with weak employment, which may signal broader economic contraction and increased downside risk for equities.