Markets rebound after selloff, September rate cut remains likely

Monday’s market sell-off

Last Tuesday, July 30, the Bank of Japan (BoJ) raised rates from a 0.00%–0.10% range to around 0.25%, marking their first rate hike since 2007 and a 15-year high. Japan has faced deflation over the past two decades, causing rates to hover around zero or negative levels. This hike, as well as Governor Ueda’s signaling of future hikes, sent the Nikkei index tanking by more than 13.00% on Monday.

These foreign interest rate movements coupled with the U.S. unemployment data published on Friday, which featured a 0.20% month-over-month increase, sent markets tumbling on Monday. The CBOE Volatility Index (VIX), known as a "fear gauge," which measures expectations of short-term volatility within the S&P 500, jumped to 38.57% on Monday, a level unseen since 2020. The Dow Jones Industrial Average dropped over 1000 points by about 2.60%, with the Nasdaq Composite and S&P 500 also falling by 3.40% and 3.00%, respectively.

Throughout the week, the market rebounded slightly, as BoJ Deputy Governor asserted that the Central Bank “will not raise its policy interest rate when financial and capital markets are unstable.” The Nikkei had its highest percentage increase since 2008 on Monday night going into Tuesday at 10.00%, and the VIX dipped down to a reading of 27.71% on Tuesday. Since Monday’s drop, the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite rebounded by 3.04%, 2.05%, and 3.37%, respectively.

Treasury yields — an uninverted yield curve?

The two-year Treasury yield dropped 40 basis points while the 10-year dropped 31 basis points from Wednesday, July 31 into last Monday, with the yield curve becoming slightly uninverted by one basis point in intraday movement on Monday. Since then, yields ticked back up to a 4.04% two-year Treasury yield and 3.99% 10-year Treasury yield, increasing by 15 basis points and 21 basis points, respectively.

Consumer and household credit reports

The Federal Reserve Bank of New York issued its Quarterly Report on Household Debt and Credit on Tuesday, with total household debt increasing $109B (0.60%) in the second quarter to $17.80T. The two most notable categories contributing to this total were mortgage debt (+$77B) and credit card debt (+$27B), with year-to-date totals of $12.52T and $1.14T, respectively. Credit card debt has remained high over the past year, with 9.10% of credit card balances transitioning to delinquency.

Following the Household Debt and Credit Report, the June consumer credit report was released on Wednesday. June marked a 2.10% total increase, down from the 3.30% increase in May. Nonrevolving credit increased by 3.40%, up from a 2.30% increase in May, while revolving credit decreased by 1.50%, down from a 6.10% increase previously. This quarterly increase in debt juxtaposed with June’s increase in credit at a slower rate indicates a possible "cooling off" in spending in the market, another signal of a slowing economy.

Fed rate cuts

Monday’s movements in the equities and bond markets influenced the market’s outlook on future Fed rate cuts, with 48.50% of the market pricing in as much as a 50-basis-point cut at the September meeting. On August 1, only 22.00% of the market was pricing in a 50-basis-point cut, illustrating the significance of the market swing this week. The CME FedWatch tool indicates that the market is pricing in as many as seven rate cuts by July 2025. Given these future expectations of lower rates currently priced into the forward curve, now could be a good time for firms to hedge and lock in market implied rate cuts.

The week ahead

Next week brings numerous key economic reports, with the U.S. Federal budget published on Monday followed by the Producer Price Index on Tuesday. CPI, U.S. Retail Sales, and the Import Price Index will be reported Wednesday and Thursday, and the week will close out with reports of July housing starts and building permits.