U.S. stock has experienced another ups and downs, and economic data and policy expectations continue to disturb the market risk preference . The healthy labor market background and the rise in crude oil prices driven by OPEC + production cuts have rekindled inflation concerns, and the tough statements of Fed officials further released a signal of radical rate hikes. However, under the downward pressure of the economy, many companies have issued performance warnings one after another, casting a shadow on the outlook for the upcoming financial report season, and US stocks may face a new round of tests.
radical rate hike expectation will start again
Over the past week, the outside world's expectations of Fed rate hike have undergone a roller coaster change. At the beginning of the week, as the US manufacturing PMI was lower than expected and Credit Suisse rumors of "bankruptcy" were reported, the market began to bet that the Federal Reserve might be forced to adjust its policies in advance in the face of economic turmoil.
However, the September non-farm employment report cooled down this expectation rapidly. Data shows that the United States created 263,000 new jobs last month, and the unemployment rate fell back to a historical low of 3.5%. Due to the continued tight supply and demand relationship between labor, wage growth rate last month continued to remain at a high level of 5.0%. Increased employment, lower unemployment rates and continued healthy wage growth indicate that the Federal Reserve's task of dealing with inflation remains arduous.
Oxford Economic Research Institute senior economist Bob Schwartz said in an interview with First Financial that the employment data for September and the previously released JOLTS report for August both show that the labor market conditions are relaxed compared to before, but only slightly cooled down. Under price pressure and a healthy employment environment, the Fed has difficulty finding a reason to stop its continued aggressive tightening pace.
Judging from the statements in the past week, many Fed officials have once again expressed their tough attitude towards inflation. For example, Fed Director Christopher Waller said that September jobs or inflation data, expected to be released later this month, will not change any Fed officials' thinking about another big rate hike in November. “There won’t be much new data that will make a significant adjustment to my view on inflation, employment and other economic sectors until the next meeting in November,” Waller added. “I expect most policy makers will feel the same way.”
It is worth noting that dove committee members are also showing signs of turning eagles. San Francisco Fed Chairman Mary Daly denied the possibility of a rate cut in 2023, believing that further rate hikes are necessary, and the Fed is determined to curb inflation by hiring interest rates. Minneapolis Fed Chairman Neel Kashkari said that the Fed could not stop its rate hikes because he did not see any signs of inflation reaching a peak.
U.S. bond yield High again in the late trading, with the 2-year U.S. bond yield closely related to interest rates rising above 4.3%, while the benchmark 10-year U.S. bond yield approaching the 3.9% mark. The market is digesting expectations of 75 basis points in four consecutive interest rate hikes in November. According to CME FedWatch Tool, the probability of raising interest rates by 75 basis points next month has risen to 82%, and the probability of raising interest rates by 75 basis points again in December is also rapidly heating up.
Schwartz told reporters that the Federal Reserve welcomes signs of a more balanced labor supply and demand, but there is no reason to step on the "brake" now, and is expected to raise interest rates by at least another 125 basis points this year. However, with the economy slowing down under tightening policies, consumer demand and inflation pressures are expected to gradually ease from the fourth quarter, causing the Federal Reserve to slow down and suspend interest rate hikes from 2023. Schwartz still maintains his judgment that the US economy will enter a moderate recession in the first half of next year. He believes that due to more active Federal Reserve monetary policy tightening, the negative spillover effect of slowing global economic activity and weak corporate profits, the US economy will stagnate throughout 2023. At the same time, as financial market turmoil intensifies, the growth prospects may face greater downward risks.
market may re-enter the turbulent period
US stocks created the best gain in the past month last week, but a new round of selling wave in the second half of the week left a shadow on the market outlook. Non-farm data has rekindled concerns about the Federal Reserve's policy and the economic outlook is facing a test. The reporter noticed that many companies have issued performance warnings recently, especially the decline in demand in the retail and semiconductor industries, which has sounded the alarm for the upcoming U.S. stock financial report season.Kent Engelke, chief economic strategist at Capitol Securities Management, said of market volatility: "This is crazy, but the participants are also nervous. Any good news is the cause of the explosive rebound. However, in the current emotional environment, the risk of panic selling has not dissipated." In addition to hiring interest rates, the liquidity impact brought by the Federal Reserve balance sheet reduction may further appear. Since September, the Fed has begun quantitative tightening at a rate of $95 billion per month, which is unprecedented. Rick Rieder, chief investment officer of BlackRock Global Fixed Income, wrote in a client note that the Fed is “pulling liquidity from the system at an alarming rate.” Since its peak in December 2021, the size of the Federal Reserve's balance sheet has dropped by $1.3 trillion.
It is worth mentioning that the market rebound has not received support for fund return. According to data from financial data supplier Refinitiv-Lipper, investors sold US$7.09 billion worth of US$7.09 billion last week, among which the outflow scale of growth fund hit a record high in the past nine months, and value fund also recorded US$1.3 billion in withdrawal. At the same time, the US media market panic and greed index returned to the extreme panic range after a week.
Many institutions are cautious about the market prospects. Mark Haefele, chief investment officer at UBS Global Wealth Management, attributed the rebound in stocks last week to the technical “oversold” of the S&P 500 index , which was exacerbated by the rebalancing of the institutional end-of-month end. Jack Janasiewicz, portfolio manager at Natixis Investment Managers Solutions, held a similar view, saying that the rebound would be helped by bearish investors after a sharp drop in September. On the other hand, although CME Group's CBOE Panic Index VIX is currently at a year-high above 30, it has not yet climbed to the level of previous selling turning points.
's upcoming financial report season may increase the risk of volatility in the market. According to statistics from Refinitiv, the net profit growth rate of the S&P 500 component in the third quarter will drop to 4.1%, far lower than 8.4% in the second quarter. The net profit growth rate of the energy sector was -2.6%, hitting a new low since the epidemic in 2020. The impact of factors such as the slowdown and the strong US dollar will be further released. As the first sector to announce its performance, due to market turmoil, financial institutions need to cope with more bad debt risks brought about by the economic downturn. Currently, the market expects that the net profit of the banking industry will decline by 10.5%. The most important economic vane, the poor performance of the banking sector may further impact market confidence, which will bring about selling pressure.
HSBC adjusted the S&P 500 index's target point at the end of 2022 from 4450 points to 3500 points, believing that the prospect of higher interest rates will put pressure on the valuation of US stock markets. Max Kettner, chief multi-asset strategist at the bank, believes that as real yields rise, stock price-to-earnings ratios "must shrink further", and under the pessimistic situation, the S&P 500 index has a risk of further falling to 3,200 points in the fourth quarter.
