USD/JPY: History suggests US recession fears may soon return, creating renewed downside risks

• Market focus returns to US economic activity data on Thursday
• US retail sales and jobless claims headline a busy calendar
• Historic patterns suggest they may come in weak
• Data weakness may prompt renewed recession fears, creating risk of renewed USD/JPY carry trade unwinds

US recession fears have eased, helped by stronger-than-expected activity data from the services sector and a sizeable drop in initial jobless claims last week. But the relative calm may not last for long with history pointing to the risk that recession concerns may soon flare again.

Historic trends hint at weak US economic data

After being dominated by inflation updates earlier this week, the focus returns to US economic activity on Thursday. Specifically, July retail sales and weekly jobless claims. According to economists, control group retail sales are expected to lift 0.1% with claims rising marginally to 235,000.

However, one glance at the charts below suggests such benign moves may not play out in reality.

Look at jobless claims over the past month. It resembles a yoyo, moving dramatically from one week to the next. If the pattern is maintained, the risk is we see another big increase today.

Source: Refinitiv 

And a modest increase in control group retail sales (which feeds directly into US GDP calculations) is also anything but guaranteed with three consecutive monthly increases not seen since 2018, pointing to the risk of a negative print today.

Source: Refinitiv 

If these patterns continue, and the emphasis is on “if”, it carries the risk that recession fears may return, creating renewed weakness in risker asset classes. While extrapolating data to formulate a particular view is fraught with danger, that’s exactly what markets have done in August, combining with weak volumes to generate extreme two-way market volatility.

Weak data may see US two-year yields retest recent lows

If we were to see claims and retail sales print weak, it would likely see markets move to price in a 50 basis point rate cut from the Fed in September, creating the risk that US two-year yields may revisit the lows hit during the market panic last week.

As I’ve covered extensively over the past few weeks, when US economic concerns have driven big declines in yields at the front of the US curve, more often than not USD/JPY has moved in the same direction.

USD/JPY looks visually heavy 

Despite the rebound over the past week, it’s noteworthy USD/JPY has been unable to reclaim the uptrend it had been in since early 2023, attracting bids below 146.50 but unable to push meaningfully above 148.00. It looks heavy visually, and if we see US yields take another leg lower, who’s to say that carry trade unwinds may not start again? If that does eventuate, it could easily see the lows struck last week revisited.

Of course, such an outcome requires the US data to come in weak first. If it doesn’t, this note is largely invalidated. It’s an important moment that could put recession fears to bed or escalate them significantly.

-- Written by David Scutt

Follow David on Twitter @scutty

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