Whether it is a quantitative analyst, stock picker, retail investors or pension fund manager, in this inflation-driven era, everyone is relying on macro data, and the situation will only get worse and worse.
Zhitong Finance learned that the correlation between S&P 500 index and the widely-watched Citi US economic surprise index has jumped to its most negative correlation level since 2015. Better-than-expected economic data has intensified expectations that the Federal Reserve will implement a destructive rate hike in , which will cause the stock market to fall to a bear market low.
Similarly, US Treasury bonds are still affected by macro data such as employment and manufacturing, and the negative correlation between this asset class and the above-mentioned Citigroup Index is also expanding. The Citigroup Economic Accident Index is an indicator to observe and quantify the current economic status. When it is a positive number, it means that the actual economic situation is better than people's general expectations, and a negative value indicates that it is less than expected.
As economic data dominates the US stock market, the CPI data to be released on Thursday is of great importance. If the data is too hot, it is very likely to put the Fed's fourth rate hike by 75 basis points, causing stock markets to fall into chaos again.
In other words: in the areas where valuation and fundamental analysis drive capital flows, every asset is being hit by endless speculation about the Fed's policy determination time and time again.
B. "Every data is viewed from the perspective of how it will affect the decision of the Federal Open Market Committee (FOMC). The only thing that could break the 'bad news is good news' fanaticism is that we have reached the point where the Fed suspends interest rate hikes."
Recently, any sign of inflationary pressure still being high will put the market in a sell mode, with stocks and bonds falling at the same time. This situation also occurred earlier on Wednesday. The U.S. September PPI announced before the trading session on Wednesday exceeded expectations, and the overnight rise of U.S. stock market futures also disappeared. However, minutes of the Fed's last policy meeting late Wednesday showed some officials saw the danger of over-tightening. Finally, the S&P 500 closed down 0.3%.
Price Market Securities LLP chief analyst Christophe Barraud said: "Any sign of a slowdown will be welcomed by stocks and bonds because it could open the door for the Fed to adjust its policy in the coming months."
However, the bet on the imminent shift to dovish — a prospect that has been flatly denied by a series of Fed officials — suffered a brutal blow last week. This week, Fed Vice Chairman Brainard said on Monday that previous rate hikes are still working on the economy, and she supports promoting rate hikes in a "conscious and data-dependent manner". The Fed's new eagle king Kashkali also pointed out on Wednesday that the threshold for Fed policy shifting is very high and now it is far from this level.
USD is one of the few assets that benefit from hot inflation and cheer for the Fed's hawkish stance. According to data collected by Bloomberg, the correlation between the US dollar and the above-mentioned Citi index is at the most positive level in five years. Meanwhile, the last time the stock market was so negatively correlated with the economic surprise was in the summer of 2015, a few months before the Fed began hikes.
September CPI annual rate data to be released on Thursday is expected to show a slight slowdown to 8.1%, reflecting a decline in gasoline prices. But core CPI, excluding food and energy, is expected to rise 6.5% year-on-year, the same as the highest level since 1982 in March. Such data is unlikely to prevent the Fed from hiking a big rate rate.
Invesco chief global market strategist Kristina Hooper said: "The correlation between asset classes and macro data is forced to rise. This will continue to happen until the Fed is no longer the key driver of the market."
At the same time, a Barclays study showed that judging from the synchronous trends of numerous indexes across regions and assets over the past 20 years, cross-asset correlation is only higher in the dark days of the epidemic. The top 50 companies in the S&P 500 are changing at a consistent level that has not been seen since the macro-driven investment climate in 2020."This once again shows that the combined effect of radical policies and slowing global economic growth has had an overall impact," said Stefano Pascale, Barclays strategist.
