The volatility of this market, which changes drastically day by day, is making it very difficult for investors. Today, the sudden drop in the market has changed the investors' sentiment to an extent where they wonder if it is possible for the investment psychology to change so quickly within a day. Yesterday, Powell hinted at a rate cut in September, which practically seemed like a declaration of a golden cross, causing stock prices to soar. However, today, with the interest rate cut in the UK, the situation has shifted to a more aggressive stance on interest rates. Currently, the market is pricing in a 70% chance of a 25 basis point cut in September, a 30% chance of a 50 basis point cut, and a scenario of two rate cuts by December has become the base scenario with over 0% probability. Even scenarios with three or more rate cuts are now close to 35%. This indicates that investors are facing a dilemma of whether to avoid the interest rate risk all at once or gradually. The market is under such pressure that it is causing concerns to the point where one must contemplate whether to avoid the risk at once or gradually.

The change in the market color is due to the ISM Manufacturing PMI released on this day. As of July, the Manufacturing PMI recorded 46.8, falling below the previous month's 48.5 and the benchmark of 50, indicating a contraction phase for the fourth consecutive month. Additionally, the Global Manufacturing PMI by SMP separately released on this day also dropped to 49.6 from the previous month's 51.6. Although it was still above the benchmark of 50, it also fell into a contraction phase. Furthermore, the employment indicators for this day were not favorable. According to the new unemployment benefit claims announced by the Department of Labor, it recorded 249,000 claims, increasing by 14,000 compared to the previous week. It was the highest number in about a year since recording 258,000 claims in the first week of August last year. The Dow Jones had expected 235,000 claims. The number of ongoing unemployment benefit claims for two weeks or more also increased by 33,000 compared to the previous week.

The manufacturing sector was in a recession, and now it has been twisting for 50 consecutive months. This is not just a story from yesterday or today, but although the number of initial jobless claims in the US has increased, this figure was seen a year ago as well when there was no recession at all. So, the number itself is not really unusual. But why did the market react so sensitively? Looking at the manufacturing ISM PMI, it has dropped to a level where concerns about a full-blown recession can be raised. When this index historically dropped to 46.8, you can see that it is closely related to a severe economic downturn. It is understandable why the market is concerned. If you look at this graph with a very high exchange rate, you can see that there is a possibility of a recession. And as I showed you this graph, interest rate cuts themselves can be positive for the stock market. It can sufficiently stimulate the stock market.

There was something, wasn't there? Yes, that's right. It's that there shouldn't be a recession. When a rate cut is accompanied by a recession, the stock market wasn't fun. Therefore, today's drop in the ISM manufacturing index, along with the decline in employment indicators, indicates that the manufacturing industry is rapidly declining, even to the point of stimulating a recession. Moreover, with the weak employment figures accompanying this, when a recessionary phase accompanied by rate cuts occurs, it significantly impacts the stock market because the market has already reflected the worst-case scenario. This scenario is highly likely to happen in reality. However, just one day before yesterday, didn't FMC Powell give a speech? This was just a day before. Economic indices don't change drastically in just one day, right? Besides, Powell is likely one of the people who look at economic data the most in the United States.

So, based on Powell's remarks yesterday, today's market reaction may have been excessive. What did Powell say yesterday? Among the journalists yesterday, there was a reporter who asked a question three times. I explained it several times. If it hits 0.5, it's an economic slowdown indicator, but now it's at 0.43. If next month's unemployment rate rises by just 0.1% from the current 4.2%, it will hit 0.5 right away or this experimental figure will come out soon. Powell said he understands this well. What explanation did he give? This is a statistical law, not an economic law. He said that after the pandemic, the economic structure has changed, and the indicators that used to be correct in the past are not fitting well anymore. He mentioned that the indicators from the past are losing their significance. If Powell predicted the possibility of a sharp drop in this manufacturing indicator in advance and mentioned it, then today's market downturn...

Concerns may have been raised, and there is room for us to consider this. If we look at yesterday's Powell's remarks supporting this, what did Powell say yesterday? The risk of a hard landing is not there. He said this just a day ago. And in response to a question about the possibility of a 50 basis point cut at once, Powell shook his head and said no. Currently, the market is greatly increasing the possibility of a simultaneous cut like the Fed, but according to Powell's outlook, it's not there. It's not really there. The possibility is not really there. This suggests that the likelihood of a severe recession is not high. Therefore, if we trust Powell's words at face value, there is no sudden economic downturn. This is one way to look at it, and if that's the case, today's market plunge may be a bit excessive. This leaves room for us to conclude. And in the same way, we can view the same graph from the opposite perspective. Water is half full.

There is still half left or less than half left. This graph shows situations where despite the contraction in the manufacturing index, the economy remained healthy without falling into a recession. As you can see from the red circle at the trough, there were many instances when it was not the case. Therefore, looking at the sharp drop in the current manufacturing index doesn't seem to be a big issue. Moreover, the latest GDP now data released on August 1st also provides many implications. GDP now had the closest prediction to the U.S. GDP in the second quarter, boasting high predictive power by updating the forecasting data in real-time as the latest data is input. From a methodological perspective, that's what it is. Not long ago, a growth rate of 2.8% was predicted for the third quarter GDP, but based on the data just released today, it has been revised down to 2.5%.

If you dissect this, today's ISM manufacturing index reflects this. One reason the growth rate forecast has dropped from 2.8 to 2.5 is because the ISM manufacturing PMI came out low. But if you take this into account and look at the GDP forecast map, what do you think? There is still a possibility of a 2.5% growth rate in the third quarter. It is hard to imagine the economy slipping into a recession with a growth rate of 2.5%. Therefore, if we trust Powell's words yesterday as they are and also trust the recent accurate GDP nowcast data, the possibility of a looming economic downturn in today's plunging stock market may have been somewhat exaggerated. Hence, today's stock market plunge may have been a bit exaggerated. Such a conclusion could be drawn. Of course, Powell's mention of inflation is temporary. Just as we hope inflation is temporary, Powell seems to have misjudged the current situation, and

GDP growth has been predicted well so far, but from now on, the predictability may decrease. It could happen. If you think like this, the opposite conclusion could also be sufficient. Moreover, with geopolitical variables coming into play, there is still a possibility of an impact on the stock market. So, I will leave the judgment to you. Anyway, the key factor determining the stagnation narrative for the time being is likely to be the upcoming unemployment rate data. If it comes out higher than expected, as I mentioned before, even if it increases by just 0.1 from the previous 4.1 to 4.2%, it could exceed the 0.5 rule. In a situation like this, if the unemployment rate rises further and stimulates a certain psychology of stagnation, the shock to the stock market could intensify. This perspective is also possible. In the end, since the stock market is also influenced by psychology, the analysis is based on that. That's all for today's briefing. Don't forget to subscribe and like.

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