The US stock and bond markets have encountered a rare 'night of horror'!
At 03:00 am Beijing time on November 10th, Federal Reserve Chairman Powell delivered a speech at an expert group meeting organized by the International Monetary Fund (IMF), releasing a "hawkish" signal. He stated that there is no confidence that the policy tightening is enough to bring inflation down to 2%, and reiterated his caution that if appropriate, the Federal Reserve will not hesitate to further raise interest rates.
This statement directly triggered a huge market shock, causing a double blow to the US stock and bond markets. US bond prices fell, and the three major US stock indices plummeted across the board. As of the close, the S&P 500 index fell by more than 0.81%, the Dow fell 220 points, a drop of 0.65%, and the Nasdaq fell 0.94%. Among them, the S&P 500 index and the Nasdaq have stopped rising for eight and nine consecutive days, respectively.
On the eve of Powell's speech, the US Treasury Department released data on a $24 billion 30-year US bond auction: the highest yield accepted at the auction was an astonishing 5.3 basis points higher than market expectations before the auction. After the data was released, there was a huge shock in the US bond market, with yields on 30-year and 10-year US bonds skyrocketing by nearly 10 basis points in just a few minutes. After Powell's speech, US bond yields accelerated their upward trend.
Powell's latest voice
Global Markets Focus on Fed Chairman Powell's Speech. At 03:00 am Beijing time on November 10th, Powell delivered a speech at an expert group meeting organized by the International Monetary Fund (IMF), releasing a "hawkish" signal.
He stated that there is no confidence that the policy tightening is enough to bring inflation down to 2%, and reiterated his caution that if appropriate, the Federal Reserve will not hesitate to further raise interest rates.
Powell pointed out that the Federal Reserve may still have more work to do in combating high inflation. The Federal Open Market Committee (FOMC) is committed to achieving a fully restrictive monetary policy stance to reduce inflation to 2% over time; we have no confidence that this has been achieved
Powell stated that he and other policy makers at the Federal Reserve are encouraged by the pace of slowing inflation in the United States, but are unsure whether sufficient measures have been taken to maintain this momentum. It is expected that the process of continuously reducing inflation to 2% still has a long way to go. Powell pointed out that inflation is still far above the level that the Federal Reserve hopes to see.
Powell stated that the Federal Reserve can still remain cautious, as the risks between too much and too little action have become closer to equilibrium. If further tightening of policies is appropriate, we will not hesitate to do so. However, we will continue to act cautiously to address the risk of being misled by months of good data and the risk of excessive tightening
Powell mentioned the progress made by the US economy. He pointed out that the annualized GDP growth rate of the United States in the third quarter was quite strong, reaching 4.9%. However, he expects economic growth to slow down in the coming quarters. The unemployment rate is still very low, but it has increased by half a percentage point this year, which is usually related to economic recession.
Powell stated that the Federal Reserve is cautious in believing that stronger than expected economic growth may weaken the Fed's efforts to combat inflation and require a response from monetary policy.
He also pointed out that looking ahead, a greater part of the progress in reducing inflation may have to come from tightening monetary policies that suppress aggregate demand growth.
Regarding Powell's speech, Nick Timiraos, a well-known financial journalist known as the "New Federal Reserve News Agency," wrote that Powell is cautious about continuing to raise interest rates or announcing the end of the hike. His speech hardly provided any more reasons for further interest rate hikes, but he added that "we do not have confidence" that the policy tightening is sufficient to reduce inflation.
Powell's "hawkish" speech dealt a blow to market expectations for the Federal Reserve to cut interest rates next year. Currently, the market expects the first rate cut by the Federal Reserve next year to be postponed from June to July.
Full line diving of US stocks
Powell's statement directly triggered a huge market shock, causing a double blow to the US stock and bond markets. US bond prices plummeted, yields returned to their upward trend, and all three major US stock indices plummeted.
As of the close, the S&P 500 index fell by more than 0.81%, the Dow fell 220 points, a drop of 0.65%, the Nasdaq Composite index fell by more than 0.94%, and the Russell 3000 index fell by 0.88%. Afterwards, the decline in US stocks continued to expand, with the Nasdaq falling by over 1%. Among them, the S&P 500 index and the Nasdaq have stopped rising for eight and nine consecutive days, respectively.
Most tech giants in the US stock market fell, with Tesla plummeting nearly 7% during the session and ultimately closing down about 5.5%, marking its largest daily decline since October 19th; Microsoft fell 0.7%, Amazon fell about 1%, Google's parent company Alphabet fell 1.2%, and Apple fell nearly 0.3%.
Popular Chinese concept stocks collectively fell, with the Nasdaq China Golden Dragon Index (HXC) falling 2%, NIO Automobile falling more than 5%, Ideal Automobile falling more than 4%, Alibaba, Baidu, JD.com, and Bilibili falling more than 2%, and Tencent Fandan, Pinduoduo, and Xiaopeng Automobile falling more than 1%.
On the eve of the speech of the Federal Reserve, the US Treasury Department released the data of the auction of US $24 billion 30-year US bonds: the highest yield accepted in the auction was an astonishing 5.3 basis points higher than the market expectation before the auction, and the proportion of domestic and international investors buying treasury bond bonds reached the new low since October 2020 and November 2021, respectively, causing primary dealers to "take over" 24.73% of unwanted treasury bond, The average value of this data over the past 6 months is 12.7%.
After the data was released, the US bond market experienced a huge shock. The yields on 30-year and 10-year US Treasury bonds have both skyrocketed by nearly 10 basis points in just a few minutes. Subsequently, the US Treasury Department and the Financial Market Association reported that due to potential cyber attacks, the liquidity of the US bond market may also be affected.
After Powell's speech, US bond yields accelerated their upward trend, with 10-year US bond yields and two-year US bond yields, which are more sensitive to interest rates, both exceeding 10 basis points on the day, and the two-year yield rebounding to 5.0%.
Analysts interpret that Powell's remarks and the disappointing auction results of the US Treasury Department have become a reasonable excuse for market funds to flee crazily, with a large amount of profitable funds cashing in profits.
Wall Street's "debt king" warning
On November 8 local time, Jeff Gundlach, the "king of debt", warned in an interview that the US $33 trillion debt mountain is becoming more and more worrisome. The interest rate of US debt is exploding, and the US economy may fall into recession sometime next year.
Gunlak stated that under the pressure of a high interest rate environment, the United States may find it difficult to avoid an economic recession and may fall into recession in the second quarter of 2024.
Given concerns about economic recession, Gonlac is not optimistic about the US technology giants in terms of investment advice, namely the so-called "Magnificent Seven" Apple, Microsoft, Google's parent company Alphabet, Amazon, NVIDIA, Tesla, and Meta.
He believes that in the upcoming recession, the "Big Seven" of US stock technology are clearly the worst performing.
At the same time, Gonlac also emphasized the serious impact of a high interest rate environment on the US fiscal situation.
He warned that in an economic recession, fiscal issues will become more severe, as changes in the economic environment will clearly have a significant impact on the fiscal situation. Once the US fiscal situation deteriorates further, it may lead to inflation.
Gunlak predicts that this may ultimately push the US fiscal deficit from 6% to 8% of GDP to 9%, while a larger deficit may exacerbate inflation and lead to a rise in Federal Reserve interest rates in the second half of 2024.
Gunlak also mentioned the burden that high interest rates bring to small and medium-sized enterprises in the United States: "The Federal Reserve's interest rates are increasing now, and the duration of high interest rates is longer. It has clearly affected small and medium-sized enterprises, and now they need to pay 9% or even 12% interest. If our interest rates continue to be higher, this will obviously bring more serious problems
Gunlak warned that the US debt figure is approaching a critical point.