US Economy Showing Stagflation... Job Recovery Must Also Be Considered

Q2 GDP Growth Rate Below Expectations... GDP Deflator Exceeds Forecast
US Fed Delays Exit Strategy Based on Jobs Data... July Employment Report to Be Released on 6th

[Image source=EPA Yonhap News]

[Asia Economy Reporter Gong Byung-sun] The U.S. economy is simultaneously facing economic recession and inflation. Amid the possibility of increased stock market volatility, securities experts suggest focusing on employment indicators.

According to Mirae Asset Securities on the 31st, the July U.S. Federal Open Market Committee (FOMC) meeting met market expectations and had a limited impact on financial markets. The U.S. Federal Reserve (Fed) decided at the FOMC meeting held on the 27th-28th to keep the policy interest rate (0.00?0.25%) unchanged and to maintain the asset purchase scale, which had been at least $120 billion (approximately 137.88 trillion KRW) per month.

However, the U.S. economy is showing stagflation characteristics, meaning the simultaneous occurrence of economic recession and inflation. The U.S. real Gross Domestic Product (GDP) for the second quarter of this year was 6.5% annualized, falling short of the market expectation of 8.5%. However, the GDP deflator, an inflation index, rose beyond expectations. Hee-chan Park, a researcher at Mirae Asset Securities, explained, “As the U.S. economy shows stagflation patterns, the yield on U.S. Treasury Inflation-Protected Securities (TIPS) is declining,” adding, “It recorded an all-time low in the 5-year and 10-year segments.”

The stock market next week is expected to focus on the U.S. employment data for July. The July U.S. employment report is scheduled to be released on the 6th. Despite high inflation, the Fed is delaying the implementation of its exit strategy based on insufficient job recovery. At this FOMC as well, the Fed stated it would decide the timing of tapering asset purchases after reviewing employment data. Researcher Park said, “When job recovery accelerates, the financial market inevitably reacts sensitively.”

Meanwhile, the July U.S. Institute for Supply Management (ISM) manufacturing index, to be released on the 2nd, is expected to remain robust. Mirae Asset Securities forecasted the ISM manufacturing index at 60.7, similar to last month’s manufacturing index of 60.6. However, the July ISM services index is expected to have a slight downside risk compared to market expectations. Last month, the ISM services index was 60.1.

Researcher Park stated, “Although the U.S. stock market’s earnings surprise ratio is close to 90% this earnings season, the power to drive stock prices up appears weaker than before,” adding, “Due to the possibility of a decline after the earnings season peak and the burden of the Fed’s exit strategy, stock market volatility may increase.”

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