Despite this month’s intense market volatility, the U.S. is “on track for a soft landing,” say analysts at Goldman Sachs.
Analysts say recent sharp market swings have been caused by positioning rather than a looming recession.
The volatility is “due as much to market dynamics and investor positioning as to the development of economic fundamentals,” the analysts wrote in a note on Thursday.
Goldman points out that the market has fluctuated over the past year on concerns about economic growth and inflation. While it was particularly volatile following a weak July employment report, the market dislocations are likely overdone.
They say it is important to pay more attention to recent data that show signs of a robust economy.
“From a market perspective, we again believe it makes sense to distance ourselves from extreme concerns and rely on the assumption of continued growth and declining inflation rather than a looming recession,” the analysts wrote.
The latest data were indeed encouraging.
Jobless claims fell to 227,000 last week, down 7,000 from the weak previous week. More importantly, inflation has also eased significantly. According to the latest consumer price index released on Wednesday, consumer price inflation fell 2.9% in July to a three-year low.
Retail sales were also encouraging, with data released on Thursday showing sales rose 1 percent in July, beating analysts’ expectations of a 0.3 percent increase.
In light of the latest data, analysts said fears from last week’s wave of selling were exaggerated.
“We think that growth fears have gone too far and appear overvalued in some places compared to our core forecast,” the analysts said.
According to the CME FedWatch tool, investors believe there is a 100 percent probability that the Fed will begin cutting interest rates in September. The probability of 25 basis points is 78 percent, and the probability of 50 basis points is 22 percent.
At the next three meetings, analysts reiterated the bank’s baseline scenario, which calls for a 25 basis point interest rate cut.
“Another weak jobs report would suggest a 50 basis point rate cut in September, but we believe the market is overstating that probability,” the analysts said.
