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September 2024
Sticking to the long game
The old saying goes that when America sneezes, Asia catches a cold.
When the July US labour market report showed nonfarm payrolls (NFP) rose by a smaller-than-expected 114,000 jobs and the unemployment rate rose to 4.3%, the risk barometer plunged in August.
Market worries about a potential US recession were compounded with concerns that the US Federal Reserve could be behind the curve in easing interest rates.
The July soft patch in the US labour market can be partially attributed to the higher labour force participation rate of 62.7 % and Hurricane Beryl, which hit the Caribbean, Mexico’s Yucatan Peninsula, and the Gulf Coast of the United States.
But the rise in the US unemployment rate triggered the Sahm rule, a macroeconomic indicator that suggests a recession has started. It has been accurate for every US recession since the early 1970s, so will this time be different?
To-date, the US economic indicators have been inconclusive. The 2-10 year US Treasury (UST) bond yield curve has been inverted since mid-2022, so any recession calls have waxed and waned since.
The Institute for Supply Management report on 5 August also showed that another economic indicator, the services Purchasing Managers Index (PMI), improved from 48.8 in June to 51.4 (above 50 marks expansion) in July. The employment gauge also rebounded from 46.1 to 51.1.
The International Monetary Fund (IMF) tips the US economy to expand by 2.6 % this year, better than 2023’s 2.5 %, before stepping down to 1.9 % in 2025.
But despite all that positivity, the US July jobs data forced a sharp market swing from greed to fear.
A selloff frenzy
In just a week, between July 31 and August 5, the S&P 500 fell 6.1 %, while the CBOE volatility index (VIX), which measures the market's expectations for volatility in real-time, spiked from 16 to a high of 61.
Both the benchmark Topic index and Nikkei 225 Stock Average tumbled 20 % over the three-day period from July 31, losing some US$1.1 trillion in market capitalisation.
It marked the sharpest selloff since the Black Monday crash (back in 1987), before a rebound of about 10 % on August 6.
Many investors pinpointed to the Bank of Japan’s (BOJ) move to hike interest rates as well as trim its monthly purchases of Japanese Government Bonds to around half its current pace.
Markets regained their composure, but the external environment has not shifted significantly as the headwinds remain familiar, namely geopolitical tensions including the ongoing conflicts in Ukraine and Middle East, as well as US-China tensions especially for strategic industries with the US presidential elections being a key risk event.
China’s recovery also remains uneven despite a supportive policy stance for its beleaguered property and weak domestic consumer sentiments.
This isn't the first time we're hearing talk about recession fears in the US. Since 2023, US recession concerns have been raised time and again.
The 3-month versus the 10-year US Treasury bond yield curve, which is commonly used as another recession indicator, has been inverted since October 2022, and probably ranks as the longest in history.
However, the US economy continued to sustain through 2023 and for the year to date in 2024, proving many naysayers wrong. So, it may be worth taking any doomsday predictions with a pinch of salt for now until there are clearer signs for worry.
What is certain is that we still live in a global economic landscape scarred by geopolitical tensions, monetary policy divergence and idiosyncratic crises.
What does all this mean for Singapore in terms of navigating these uncertainties?
The long game
Amid volatility in world markets and the simmering fears of a US recession, it's worth noting that Singapore's economy has been stable.
GDP growth came in better-than-expected at 2.9 % year-on-year in the second quarter in 2024.
The official growth forecast for 2024 has been narrowed to 2 % to 3 % by the Ministry of Trade and Industry, at the higher end of its earlier estimated range of 1 % to 3 %.
The Monetary Authority of Singapore’s growth assessment for the Singapore economy also remains fairly sanguine, noting that the slightly negative output gap should close by end-2025.
Singapore has weathered many economic storms in its relatively short 59-year history.
Notwithstanding the capriciousness of financial markets and the uncertainties brought about by geopolitical tensions, Singapore has always played the long game in terms of getting the fundamentals right with policymaking.
This may still be the best strategy forward in today’s volatile, uncertain, complex, and ambiguous world.
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