Anatomy of a rout

Rob Armstrong (0:06)

Pushkin. We've had a harrowing couple of days on markets. Friday and Monday were abysmal. It's tuesday morning, and things look a little bit better. But something has changed, and something has spooked the market. On today's show, who was it? Or rather, who done it? This is Unhedged. The Markets and Finance Podcast from the Financial times. I'm Rob Armstrong, coming to you from Unhedged World Headquarters in New York City. And joining me today, a special guest star, Nicholas Megaw, the FT's capital markets correspondent. Nick, thank you for being on the show.

Nick Megaw (0:50)

It is actually Megaw. But Americans can't say it anyway. Megaw! Yeah, I did go to high school, so.

Rob Armstrong (0:56)

Yeah. All right. Nick, what just happened?

Nick Megaw (1:00)

A lot. A lot just happened. The longer I spend writing about equity markets, the more convinced I am that they don't always make a whole lot of sense. So trying to blame it on a single killer is probably a bit much, but.

Rob Armstrong (1:20)

Nick, you're never going to make it as a journalist if you don't learn to oversimplify. So start learning now. Please oversimplify.

Nick Megaw (1:27)

Okay. Economy bad.

Rob Armstrong (1:30)

Economy bad.

Nick Megaw (1:30)

Japan, scary. Retail investors, dumb.

Rob Armstrong (1:34)

Yeah. Okay, let's start with economy bad. We wrote in the newsletter that it's not necessarily as bad as people, certain hyperventilators in the punditocracy are making it out to be. But there's mixed signals, right? We got a bad employment report.

Nick Megaw (1:54)

We got a like not great employment report.

Rob Armstrong (1:56)

A hundred and fourteen thousand jobs created against that kind of two hundred thousand jobs level that we'd been bouncing around near. But there are a lot of temporary factors in there.

Nick Megaw (2:06)

Yeah, you've got like hurricanes, you've got just general summer. yes. It's more complicated than it.

Rob Armstrong (2:12)

Than it looked.

And then we got a lousy ISM survey of manufacturing businesses. And that spooked people too. That was actually the day before the jobs report, the day after the jobs report, the day before. And this is the most watched, broadest survey of businesses. And that showed manufacturing and contraction. It feels like that was the one-two punch. But a few days later, on Monday, we had ISM services, same survey, different sector of the economy that did well.

Nick Megaw (2:47)

Yeah. I mean, like the net picture is kind of, the economy is clearly less strong than it was. It's not that bad. Which in a way is what people have been pushing for for the last year and a half.

Rob Armstrong (3:00)

You make a really good point there. What are Fed rate increases supposed to do? Slow the economy. What do we have?

Nick Megaw (3:11)

Slow our economy.

Rob Armstrong (3:12)

Slow our economy.

Nick Megaw (3:14)

What's the best way to bring down inflation? Weaken the job market.

Rob Armstrong (3:18)

Weaken the job market. And here we are. Inflation looks to be just about a target, but surprise, surprise, we have a slightly slower economy. But in the Don't Panic department, we just got the GDP figures for the second quarter. 2.8%, I think. So it's not like we've murdered the economy and the job market. We've just calmed it down a little bit. Okay. What was next on your list? We had economy bad and our conclusion is actually not that bad.

Nick Megaw (3:49)

We have Japan scary.

Rob Armstrong (3:50)

Japan scary. So they really fell out of bed. Monday morning, the Nikkei was off 12% or something like that.

Nick Megaw (3:57)

Yeah, it was the worst result in 37 years, something like that.

Rob Armstrong (4:03)

Worse than that, it was extremely embarrassing for the Unhedged newsletter because we've been quite bullish on Japan for quite a long time. They're finally getting deflation under control. They're very competitive. Many of their businesses are doing well. There are signs of improving growth, et cetera, et cetera. What happened there?

Nick Megaw (4:24)

I mean, even after the decline, to be fair, still doing better this year than, you know, US small caps, which people have spent the last three weeks are saying is the next big thing. So you're at least not alone in being a general forecaster.

Rob Armstrong (4:37)

yes. But I mean, why Japan? We had this lousy day on Friday in the US and then we wake up and Japan doesn't just mirror the drop in US risk assets. It sort of doubles it. Do we have a theory about why the reaction there was so violent?