U.S. stock rebound momentum was blocked last week, and dived in the late trading showed a comeback. Although Fed Chairman Powell hinted that it would slow down the pace of rate hikes, the latest data warns that inflation cooling is still arduous, exacerbating concerns that the Fed may adhere to austerity policies for longer periods of time, leading to a recession. Fund flow shows that last week, the net outflow of US stocks fund exceeded US$26 billion, and the Panic Index VIX rebounded sharply from its low this year to more than 15%. Considering the drastic short-term fluctuations brought about by the Federal Reserve’s resolutions this year, investors are preparing for the war.
The Federal Reserve’s resolution has many highlights
Before the start of this week’s silent period, Powell had set the tone for the December interest rate meeting, and the radical interest rate hike policy starting in June is likely to gradually slow down. At the same time, he also pointed out that there is still a long way to go to restore price stability, and history strongly warned not to relax policies too early.
As the non-agricultural, ISM service industry index and producer price index PPI were released in November, indicating that the employment market is hot and inflation has cooled down less than outside expectations, The US economy is still expanding steadily, which has intensified the outside world's concerns about the further extension of monetary tightening. Tensions in labor demand have become a "difficulty" facing the Federal Reserve. Although the Federal Reserve survey shows that job vacancies across the United States have fallen from record highs, corporate recruitment has slowed down, and layoffs have occurred in some industries. However, the economic situation previously announced Beige Book still points out that labor shortage is still widespread, exacerbating the pressure on enterprise labor costs.
Oxford Economic Research Institute senior economist Bob Schwartz said in an interview with First Financial that due to factors such as inflation, employment, wage growth and consumer spending still far exceeding the level that the Fed feels comfortable with, the reasons for maintaining a hawkish stance in the short term are still very sufficient. It is obvious that reducing inflation to the medium-term target of 2% will take time as rising labor costs continues the rising pressure on service prices, as this was confirmed in the latest PPI data in November.
US bond market reflects the subtle changes in investors' expectations for monetary policy tightening. The 2-year US bond yield html, which is closely related to interest rate , rose 6 basis points to 4.34% in 2 weeks, while the benchmark 10-year US bond treasury hit the largest increase in the past five weeks. CME CME Federal Funds Rate Futures shows that the probability of raising interest rates by 50 basis points in December is 78%, but the Federal Reserve's terminal interest rate target is approaching 5% again in June next year. Schwab Financial believes that if inflation continues to show stubbornness, the Fed will have to slow down the economy with greater policy determination.
market has turned its attention to the November Consumer Price Index (CPI) released the day before the interest rate meeting, which will provide an important reference for the Fed's policy tightening path in the future. The latest consumption survey released by the University of Michigan shows that the one-year inflation expectation fell to 4.6%, the lowest level since September 2021. If the decline in CPI data last month is greater than market expectations, it is expected to alleviate policy pressure and thus increase the possibility of a soft landing in the future.
Schwartz told reporters that he believes that the Fed's 50 basis points rate hike in December is almost no suspense. More importantly, the Federal Reserve's quarterly economic forecast summary SEP, which will include future interest rate hike paths and economic forecasts. However, future policy decisions will still depend on data. After the rate hike slows, we need to continue to pay attention to consumer spending, a key inflation driver, which determines the pricing power of companies. He believes strong job growth and wage growth, coupled with the release of excess savings, have driven consumption power over the past year, but there are signs that low-income households have begun to rely more on credit to maintain purchases. As the impact of interest rate hikes is gradually released, the US economy will face recession pressure starting in the second half of next year.
Economic cloud may impact the market
The rebound of US stocks starting from the October low encountered challenges last week, with the Dow Jones Industrial Average and S&P 500 index both showing their biggest single-week declines in the past two months. Pessimistic remarks from Wall Street executives have aggravated concerns about recession, and the uncertainty of in the rate hike cycle has once again disturbed the market.
As an important weather vane for the real economy, the banking industry’s reference to the future judgment is self-evident. In the past week, many senior executives of major American banks, including Goldman Sachs , JPMorgan Chase , Bank of America , and Citi , have made pessimistic statements. For example, Goldman Sachs CEO David Solomon warned that the U.S. economy will slow down next year and face bumps in the future, and Goldman Sachs will have to prepare for cutting employee salaries and layoffs. Solomon said the probability of a soft landing in the U.S. economy in 2023 is 35%.
funds choose to leave the venue and wait and see on the eve of the interest rate meeting. U.S. equity funds recorded a net outflow of $26.66 billion in the week ended December 7, the largest record since April 2021, according to financial data provider Refinitiv Lipper. At the same time, US money market funds have received $36.19 billion inflows, and investors have a strong atmosphere of active risk aversion. However, the multiple short-term rebounds after the Federal Reserve’s resolution this year have also made many people hope.
It is worth noting that the CBOE Panic Index VIX, which measures the volatility of the stock index, rebounded sharply from its lows this year in the past week, with the largest increase once approaching 20%. Nicholas Colas, co-founder of DataTrek Research, said that VIX reaches below 20 levels is usually a warning sign that stock is easily sold. "The market is too complacent about policy uncertainty and its forecast for corporate profits in 2023. Historical data shows that when VIX is below 20 levels, the market often experiences short-term adjustments soon." The economic pressure under the interest rate hike cycle of
is currently a major test that Wall Street believes is facing before the first half of next year. Lisa Shalett, chief investment officer of Morgan Stanley Wealth Management, said in a report that some large companies may be far more shocked in profits next year due to slowing economic growth in and inflation eroding consumer purchasing power. This outlook is not reflected in the current earnings expectations, and despite repeated downward revisions, the current earnings expectations are still too high.
Mark Haefele, chief investment officer of UBS Global Wealth Management, believes that as 2023 enters, the fundamental challenges of rising interest rates and slowing economic growth will still exist, and the economic conditions for continued improvement are not yet met. "Given the prospect of a cyclical rebound, we are more inclined to increase strategies to protect downside while maintaining upside risks, such as buying safe havens like the US dollar and Swiss franc and seeking irrelevant returns through alternatives," he said.
