At the beginning of this week, all Wall Street professionals were eagerly awaiting Nvidia's financial report, hailed as the "most important stock on Earth," which could provide new guidance for the US stock market. However, as the week draws to a close, people suddenly realize that the true "protagonist" of the US market this week is not Nvidia's "Leather Knife Show"
Nvidia's performance is impressive - the company's revenue, profits, and Q2 guidance all exceeded market expectations, and its stock price rose significantly after the financial report was released. On Thursday, it surged 9.3% in a single day, reaching a new historical high. However, all of this did not save the fate of the US stock market falling sharply for two consecutive days on Wednesday and Thursday.
A regrettable comparison is that although Nvidia's market value surged by $230 billion on Thursday, the total market value of the US stock market still plummeted by about $500 billion on that day.
As of the overnight close, the S&P 500 index fell 0.7%. The Nasdaq Composite Index fell 0.4%. The Dow Jones Industrial Average fell about 600 points, a 1.5% decline, marking the largest daily percentage decline since the Silicon Valley banking crisis in March 2023. This is the second consecutive day of decline for the three major indexes, with only Nvidia rising on Thursday among the seven major US stock indexes
So, what exactly prevented "the most important stocks on Earth" from saving the US stock market?
The spearhead of Wall Street is once again pointing to the explosive US economic data like a bolt from the blue, as well as the shattered expectations of the Federal Reserve's interest rate cut in the market
US data is a bolt from the blue
As mentioned in our report yesterday, the latest meeting minutes released by the Federal Reserve on Wednesday this week have "dug a big hole" - although Federal Reserve Chairman Powell confidently stated at the post meeting press conference that the next step for the Fed is unlikely to be a rate hike. But the latest details of the meeting minutes revealed that Powell's "dove like" stance at the time may have largely overshadowed the voices of hawkish officials.
This hawkish summary shows that "many" Federal Reserve officials question whether the policy's limitations are sufficient to bring inflation rates down to target levels, and multiple officials have mentioned their willingness to further tighten policies if necessary.
After the release of the Federal Reserve minutes, the market's expectations for the Fed to cut interest rates twice within the year quickly cooled. And all of this, with a series of new hot US data released this Thursday, has become even more severe
Thursday's US financial market actually proved once again the destructive power of the current "good data" on Wall Street: against the backdrop of still sticky inflation, US business activity has accelerated, which has strengthened people's expectations that the Federal Reserve will continue to maintain high interest rates for the long term, leading to a decline in the stock and bond markets.
According to data released by S&P Global on the same day, the US Composite PMI index rose more than 3 points to 54.4 in May, the highest level since April 2022. Among them, the manufacturing PMI reached a new high in two months and broke through the 50 mark, while the service industry PMI reached a new high in 12 months.
A PMI reading above 50 indicates an expansion of industry activity. And Thursday's data also exceeded the expectations of all surveyed economists. The rise of this PMI indicator indicates that overall economic activity in the United States is still significantly accelerating after entering the middle of the second quarter. This has reversed the previous downward trend of some economic indicators, with recent data showing sluggish retail sales and a decline in manufacturing output in April, indicating that the overheating of the US economy at the beginning of this quarter has eased.
From the sub item data, the most worrying aspect of the overnight PMI indicator may be that it indicates that the downward trend in US prices will continue to fluctuate - factory input prices are rising at the fastest rate since November 2022, and service provider payment and receipt prices are also increasing. In the comprehensive PMI data, the indicator measuring input prices has risen to the second highest level since September last year.
Chris Williamson, Chief Corporate Economist at S&P Global Markets Finance Intelligence, said in a statement, "Interestingly, the main driving force of inflation now comes from manufacturing rather than services, which means that according to pre pandemic standards, cost and sales price inflation rates in both industries have increased, indicating that the last mile of achieving the Federal Reserve's 2% target still seems unattainable."
Williamson also pointed out that the US Composite PMI index, which has reached its highest level in 25 months, clearly "will cause concern for the Federal Reserve.".
In addition to PMI, the latest weekly employment market indicators released on Thursday also performed well. Data shows that the number of initial jobless claims in the United States decreased by 8000 to 215000 in the week ending May 18th, marking the largest consecutive decline since September last year, with market expectations of 220000.
Wall Street's "broken heart"
For most of the year, the market's expectations for the Fed's rate cut this year have actually been cooling. The rare turning point should be in the past few weeks - some economic indicators reflecting the start of the second quarter have shown signs of decline, and inflation data has also shown a welcome decline.
However, just as people were eagerly anticipating a "good thing" for the Fed's September rate cut, this week's Fed minutes and the latest PMI data played a small joke on traders, which also shattered the market's hard-earned expectations of the Fed's rate cut once again
The latest pricing in the interest rate market shows that after multiple sets of hot US economic data were released on Thursday, traders currently expect the Federal Reserve to only cut interest rates by 35 basis points this year, which is further lower than the 40 basis points from the previous trading day. In terms of frequency, this indicates that the market's benchmark estimate has returned from two interest rate cuts to one.
At the same time, traders have directly postponed the estimate of the first rate cut by the Federal Reserve from November to December.
In the bond market, due to the impact of the expectation of the Federal Reserve's interest rate cut, the yield of US Treasury bonds of all maturities also surged overnight. As of the end of the New York session, the yield on the 2-year US Treasury bond increased by 7.2 basis points to 4.952%, the yield on the 5-year US Treasury bond increased by 6.8 basis points to 4.537%, the yield on the 10-year US Treasury bond increased by 5.5 basis points to 4.483%, and the yield on the 30-year US Treasury bond increased by 4.4 basis points to 4.585%.
"The S&P PMI index has never really had a significant impact on the market before, but suddenly (Thursday) it caused a sensation. The only thing I can think of is that the manufacturing sector has rebounded stronger than the market expected," said Ellis Feifer, Managing Director of Fixed Income Capital Markets at Raymond James
"I suspect that the market has been lacking vitality and people's response to initial claims for unemployment benefits is not significant. However, when you combine better than expected unemployment benefits reports with PMI, the calm market will stir up waves," added Feier
In the foreign exchange market, the ICE US dollar index, which tracks the basket prices of six major currencies including the US dollar against the euro, also rose above the 105 mark on Thursday, continuing to hit a week high. Marc Chandler, Chief Market Strategist at Bannockburn Global Forex LLC, said, "The currency market trend shows that the market is still responding to strong US economic data in an expected manner, and I think there is still some upward space for the US dollar."
It is worth mentioning that Federal Reserve officials also released another "hawk sound" to the outside world on Thursday. This year, the vote committee and Atlanta Federal Reserve Chairman Bostic stated overnight that monetary policy is not as effective in slowing economic growth as in previous cycles, so it is more necessary to maintain high interest rates in the long term to curb inflation. Although Bostek believes that the Federal Reserve will start cutting interest rates before the end of this year, it is not possible to do so before the fourth quarter.
The next FOMC meeting will be held from June 11th to 12th.
Regarding the current market situation and the key indicators that will be faced in the future, Vail Hartman, US interest rate strategist at Mandi Bank Capital Markets, said, "Overall, we are in a consolidation mode and waiting for key information to be released. The next important data is next week's Core Personal Consumer Expenditure (PCE) Price Index. However, I believe that considering earlier Consumer Price Index (CPI) and other inflation data, the market has already made a good judgment on the new PCE.". The next important indicator after PCE will be the May non-farm employment report released on June 7th