is similar to the previous few interest rate meetings this year. Fed rate hike has once again become a catalyst for the short-term rise of U.S. stocks .
market quickly digested the negative news caused by GDP in the second quarter, and turned its attention to the potential prospect of weakening monetary policy tightening. At the same time, the market technology stocks represented by Apple and Amazon released strong results, which also boosted market confidence, and the impact of the economic downturn on various industries is better than previous expectations.
Next, the financial report season performance and economic outlook impact on monetary policy that enters the second half is expected to continue to become the main factors affecting market trends. The return of risk preference is expected to help further expand the rebound space.
Economic slowdownFeder times stressed
International Monetary Fund (IMF) sharply lowered its forecast for U.S. economic growth last week, and it is expected that U.S. GDP will grow by 2.9% this year, far lower than the previous 3.7% forecast. The latest series of data released also shows that the US economy has continued to face slowing pressure since the end of the second quarter, real estate sales have continued to be sluggish, Chicago PMI has dropped to a low in the past two years, and University of Michigan Consumer Confidence Survey showed that respondents' confidence in the short-term outlook has dropped to a new low since 2009.
Oxford Economic Research Institute Senior economist Bob Schwartz said in an interview with First Financial reporter that as the US GDP continued to decline in the second quarter, the debate on whether the economy was in a recession reached a climax. It can be seen that in the face of continued high inflation and rising interest rate levels, the expansion of business activities is indeed slowing down. However, inflationary pressure has not been significantly alleviated, personal consumption expenditure (PCE) and labor costs are still under great pressure, and the Federal Reserve's goal of trying to achieve soft landing is still arduous.
In order to control inflation, the Federal Reserve announced the second consecutive rate hike of 75 basis points this year, which also made the interest rate trajectory in this round of interest rate hike cycle the steepest since 1981. The Fed continues to pay close attention to inflation risks, reflecting the imbalances of supply and demand related to the epidemic, rising food and energy prices and wider price pressures. At the same time, the Fed has also paid attention to economic pressure and acknowledged that uncertainty has increased significantly compared to previous years. Federal Reserve Chairman Powell expects economic growth to fall below trend levels for some time, which may be a necessary condition for reducing inflation.
Schwartz told reporters that the Fed's attitude towards inflation is still vigilant and reiterated its long-term 2% target, which is the reason for the continued aggressive rate hikes in July. But the slowdown in momentum in some sectors of the economy has attracted attention, which is why the Fed chairman stressed that future policy decisions will depend on data, suggesting that the pace of rate hikes may slow down at some point.
Recent U.S. bond trend also reflects investors' latest assessment of policy prospects. The 2-year U.S. bond yield linked to short-term interest rate expectations has fallen back to around 2.89%, and the 10-year Treasury bond fell to a new low since April, falling by more than 80 basis points since the March high. It is worth mentioning that the inversion of the 2/10-year U.S. Treasury yields are still at high levels in recent years. As an important signal to predict a recession, investors are still cautious about the economic outlook.
Schwartz believes that although Powell did not give clear information on the rate hike in September, the Fed may slow down the intensity of policy tightening afterwards. He expects a 25 basis point adjustment to be the main policy option before the Fed's peak rate next year. Schwartz does not agree with the recession as the labor market and U.S. household savings are resilient under downward pressure on the economy. However, it is necessary to pay attention to the path and speed of inflation cooling, which will affect the possibility of a soft landing in the economy.
bulls may still have room for rebound
After experiencing a turbulent first half of the year, the strong rebound last week made the US stock market perfectly close in July. Dow Jones market statistics show that the Dow Jones Index rose 6.7% this month, and the S&P 500 rose 9.1%, both setting a record of monthly gains since November 2020, while the Nasdaq 's 12.1% increase in a single month set a new record of the same period in history.
As a factor that has continued to disturb the market before, the Fed's looseness in its interest rate hike position is undoubtedly regarded as a major positive. David Kelly, chief global strategist at JPMorgan Asset Management, said in a note: "Although the latest GDP data has intensified the pessimism about the U.S. economic conditions and corporate profit outlook. The silver lining is that the Fed, which claims to rely on data to determine policies, should see that there is reason to slow down the pace of rate hikes for the rest of 2022." The
financial report season has also become a source of market confidence. According to IBES data from Refinitiv, 77.8% of the 279 S&P 500 components that have announced profits so far exceeded expectations. Analysts expect earnings growth to reach 7.1% this quarter, a sharp correction from the 5.6% forecast in early July.
The market sentiment is extremely pessimistic and is also regarded as an important driving force for this round of market rebound. The Bank of America fund manager survey previously released showed that institutions' holdings in the U.S. stock market fell rapidly, and nearly 58% of fund managers said that their risk asset exposure was lower than normal, which was lower than the extreme value of the 2008 financial crisis. At the same time, the American Association of Individual Investors (AAII) market sentiment survey, which measures market sentiment, is also at a freezing point this year. Growth stocks that have performed weakly this year have recently seen a strong rebound, and funds have begun to buy on dips again. Art Hogan, chief investment strategist at National Securities, said: "The worst situation has been priced, and the reality is better than people are worried. If this process continues, it is likely to help the market rise further." Danny Kirsch, head of options at
Piper Sandler, said that with the dust settled last week's financial report and GDP and Fed resolutions, in addition to the Jackson Hall Global Central Bank Annual Meeting held in Wyoming in the summer, the market's catalyst will gradually turn to the performance of economic data, which will leave the Federal Reserve enough time to observe the impact of monetary policy and follow-up plans.
As the US stock market rebounds, CME Group CBOE Panic Index VIX, which measures market volatility, has fallen back to a new low in the past three months. According to statistics from Schwab Financial , the open positions of VIX call options and put options increased by 3.5% and 7.8% month-on-month respectively last week. Meanwhile, the open positions of S&P 500 call options and put options increased by 2.3% and 1.2% month-on-month respectively. Both show that a lot of funds are betting on the short term that US stocks will continue to rebound.
