Driven by factors such as slowing inflation and unexpected economic growth, the upward trend of US stock market volatility continues, and the panic index VIX, which measures market volatility, is at a nearly one-year low.
In the coming week, a series of risk events will continue to test investors, with the Federal Reserve's statement regarding the prospect of interest rate cuts potentially having a significant impact on risk appetite, and the intensive disclosure of performance in large technology stocks becoming a potential trigger for volatility risk.
How does the Federal Reserve comment on interest rate cuts
The economic data from the past week shows that the prospect of a soft landing for the US economy seems to be becoming clear. The US Department of Commerce stated that the US economy grew by 3.1% in the fourth quarter of last year. A resilient labor market supports strong consumer spending, while increased exports, government spending, and commercial investment also contribute to expansion. The strong momentum continued into January, with the US Composite Purchasing Managers Output Index (PMI) rising to 52.3, the highest level since June last year, and both service and manufacturing activities showing signs of recovery.
At the same time, the anti inflation trend is still in operation, and personal consumption expenditure (PCE) has remained below 3% for three consecutive months. As the preferred inflation indicator of the Federal Reserve, the core PCE growth rate without considering energy and food has fallen to 2.9%, reaching a new low since the first quarter of 2021.
Bob Schwartz, senior economist at the Oxford Institute of Economics, said in an interview with First Financial reporters that the resilience of the economy has been fully demonstrated, and the United States is entering 2024 on a strong basis. "Overall, the risk of recession seems to be receding, reducing the pressure on the Federal Reserve to cut interest rates faster than expected to support the economy."
The yield of US Treasury bonds fluctuated narrowly, with the 2-year Treasury bond closely related to interest rate expectations falling 4.1 basis points to 4.37% on a weekly basis, and the benchmark 10-year Treasury bond rising 1.4 basis points to 4.16% on a weekly basis, marking the second consecutive week of upward movement. Federal funds rate futures show that the possibility of a rate cut in March is hovering around 50%, and the market's focus has shifted to May.
According to Olu Sonola, the head of regional economics at Fitch Ratings in the United States, it is clearly too early to start cutting interest rates in March. "From any perspective, the United States has shown strong resilience, especially against the backdrop of the Federal Reserve's aggressive monetary policy tightening cycle."
This week, the Federal Reserve will hold its first interest rate meeting of the year. Schwartz told First Financial that the Federal Interest Committee (FOMC) may once again reiterate and affirm the strength of the economy and the progress it has made in curbing inflation. "However, considering its policy dependent stance, the Federal Reserve will keep interest rates unchanged but will not further imply a clear easing policy."
He further analyzed that the Federal Reserve needs to see concrete evidence of weak demand, including a slowdown in nominal wage growth and a decline in inflationary pressures in core service industries, in order to be confident that inflation is moving towards a sustainable direction of 2%. He expects that consumers will continue to support the expansion of the US economy in the first quarter, but the shift in Federal Reserve policy is only a matter of time, and the second quarter may be a time window.
The market will face multiple challenges
The US stock market entered the last trading week of the first month of the new year with three consecutive positive days on a weekly basis. Last week, the Dow Jones Industrial Average broke through 38000 points for the first time in history, the S&P 500 index broke records consecutively, and the Nasdaq was only 5% away from historical highs.
Star technology stocks have ushered in a series of milestones, as investors' optimism about the economy, positive performance, and bets on artificial intelligence have driven a new round of gains. Microsoft's market value has exceeded $3 trillion, and Facebook's parent company Meta has returned to $1 trillion after three years. According to Dow Jones market statistics, 78.2% of the S&P 500 index constituent companies that have already announced profits exceeded market expectations, significantly better than the historical average of 67%.
However, the strength of artificial intelligence cannot fully reflect market sentiment. According to LSEG statistics from the London Stock Exchange, US stock funds had a net outflow of $3.04 billion last week, marking the fourth consecutive week of outflows. At the same time, money market funds with hedging attributes were net reduced by $9.06 billion, and many investors remained cautious on the eve of the Federal Reserve's decision.
It is worth noting that the explosive performance of the two companies in the past week has triggered pre market volatility in the US stock market, with Intel and Tesla plummeting more than 10% on the day, indicating the destructive impact of their financial reports on stock prices and the market. In the next week, five of the seven tech giants - Apple, Microsoft, Amazon, Google's parent company Alphabet, and Facebook's parent company Meta - will release financial reports one after another, with greater weight and higher valuation levels indicating risks and opportunities. Quincy Krosby, Chief Global Strategist at LPL Financial, said, "Profitability and guidance are crucial for continuing to support large technological forces in the market."
Jiaxin Wealth Management wrote in its market outlook that the US stock market continues the "melt up" model, but with the Federal Reserve's interest rate meeting, non farm reports, and the release of performance by several large technology stocks, investors are evaluating the future of the technology industry while preparing for higher volatility.
The institution believes that considering the continuous overbought technical indicators of multiple technology stocks after significant gains, it is necessary to prevent the impact of unexpected financial reports on fanatical risk appetite and trigger small-scale market adjustments. Of course, if the performance and guidance from large technology stocks are impressive, it may open up further upward space for the US stock market and continue investors' optimistic hopes for artificial intelligence.