Last week, the rebound of US stocks suffered a slight setback. The latest statement of Federal Reserve Chairman Powell made the market reassess the future policy path. However, the US treasury bond auction was mixed, allowing long-term US bonds to continue to repair the market.
As the financial reporting season approaches its end, the market focus will once again shift to seeking policy clues from economic data and official speeches. Coupled with uncertain factors such as a possible shutdown by the US government, the impact of US bond trends on market trends may continue.
The Federal Reserve's "Eagle Wind" Rises Again
Contrary to the optimistic signals received from economic data and Fed decisions last week, the Fed has once again chosen to cool its policy shift towards expectations.
Powell raised potential expectations for further interest rate hikes during a panel discussion organized by the International Monetary Fund (IMF). He stated that interest rates may not be sufficient to sustain the medium-term target of reducing inflation to 2%, and it is necessary to be vigilant against the illusion of inflation falling back.
It is worth mentioning that the latest consumption survey by the University of Michigan also shows this risk. As consumer sentiment further subsided, the one-year inflation expectation for American households rose to a seven month high of 4.4%. At the same time, the five-year inflation rate rebounded from the previous 3.0% to 3.2%, reaching the highest level since March 2011. Since March 2022, the Federal Reserve has raised interest rates by 525 basis points, and inflation has fallen from a high of over 7% to around 4%. Federal Reserve officials closely monitor consumers' attitudes towards price trends, and the stickiness risk of long-term inflation will make future policy decisions more cautious.
Bob Schwartz, a senior economist at the Oxford Institute of Economics, said in an interview with First Financial reporters that from Powell's speech, the main policy risk for the Federal Reserve next is still interest rate hikes, as inflation may take longer to return to its target. He emphasized this possibility to prevent the outside world from pre setting policy paths at the end of the interest rate hike cycle.
In fact, Powell's statement did not clearly deviate from the statement of interest rate resolutions. He reiterated that policy decisions will be made at each meeting and will continue to be cautious to prevent the risk of being misled by optimistic data and excessive tightening. From the statements of other Federal Reserve officials compiled by First Financial, inflation is still considered a major risk factor, suggesting that it is unwise not to raise interest rates further. However, whether further tightening is necessary remains to be seen.
JPMorgan economist Michael Feroli stated that the Federal Reserve is concerned that anti inflation may become more painful in the future, "so their stance should be a reminder that their rhetoric must remain firm until inflation improves further
The US bond market quickly reflects subtle changes in policy prospects. The yield of the two-year US Treasury bond rebounded to 5.06%, rising 23 basis points in a week, the largest weekly increase since May, equivalent to space for a rate hike. Affected by tepid auction demand, long-term US bond yields have stabilized, with 10-year US bonds rebounding by 6 basis points to 4.63%, and 30-year US bonds falling by nearly 2 basis points to 4.73%. Federal funds rate futures show that the likelihood of the Federal Reserve raising interest rates in the next two meetings has risen to nearly 25%, with the first rate cut being pushed back to June next year.
Schwartz told reporters that he maintains his judgment that the Federal Reserve has ended raising interest rates. With the impact of monetary policy emerging, it is expected that economic growth will significantly slow down in 2024 and maintain positive growth, as the labor market remains healthy. He further analyzed that wage growth is now more flexible than before, and the peak unemployment rate may be lower than previous tightening cycles. This will slow down the adjustment of the labor market and support people's income growth for a longer period of time, and inflation will take longer to recover to 2%. He predicts that the first rate cut by the Federal Reserve may need to wait until the third quarter of next year.
Can the rebound go further
Despite encountering policy expectations, the rebound in the US stock market continued last week, with the Nasdaq and S&P 500 index setting their longest consecutive gains in nearly two years, and the three major stock indexes reaching their highest levels in nearly two months.
Greg Bassuk, CEO of AXS Investments, said: "From the current situation, the theme of long-term high Federal Reserve interest rates is more likely to emerge. This is the downside, From a positive perspective, investors have seen strong profits and a resilient economy. Therefore, all attention is focused on economic data or comments from the Federal Reserve, which may provide better feedback on the future direction of the market
In terms of capital flow, market risk appetite has recovered. According to financial data provider LSEG, US stock funds received a net inflow of $1.9 billion last week, marking the first time in eight weeks that funds have returned. At the same time, US money market funds received $6.47 billion from investors, shrinking to one tenth of the size of the previous week, indicating a easing of risk aversion.
With investors betting on Federal Reserve policy expectations, some institutions believe that the rebound space requires more factors to stimulate, otherwise they may face a comeback of selling pressure.
Marko Kolanovic, chief strategist at JPMorgan Chase, stated in a report that due to the many challenges facing the market, including the possibility that the Federal Reserve may refuse to cut interest rates in the face of an economic slowdown, the stock market may decline in the fourth quarter, The decline in bond yields and the dovish central bank meeting are interpreted by the stock market as positive factors in the short term. However, as the Federal Reserve continues to maintain high levels for a longer period of time, earnings expectations are overly optimistic, pricing power is weakening, and profit margins are at risk. Stocks will soon recover to unattractive risk returns
Technically, the US stock market has also entered an important pressure level. Matthew Weller, Global Research Director at Forex, stated in a report that the S&P 500 tested moving average resistance between 4400 and 4415 points. "From a larger perspective, bulls need to see the S&P ultimately break through 4415 points before announcing that the adjustment since July has ended," he wrote.
Jiaxin Wealth Management stated in its market outlook report that it holds a moderately optimistic attitude towards the next week, with inflation indicators and consumer performance being the focus. The trend of economic cooling is expected to alleviate the pressure on the Federal Reserve to continue its actions. However, it is still necessary to be vigilant about the volatility risks brought by the US bond market, as the government's suspension of negotiations and Moody's credit rating downgrade may have a short-term bearish impact.