The motto of Wall Street once warned people not to oppose the Federal Reserve. However, this is exactly what traders are currently doing, and it may trigger a rapid rebound in some forgotten corners of the stock market
Last week, the Federal Reserve's interest rate forecast and the hawkish remarks of Federal Reserve officials were all too clear - investors were repeatedly warned that interest rates would remain high for a longer period than expected, and the median forecast of the Federal Reserve's interest rate chart was only one rate cut this year.
But it is clear that the US bond market is giving investors a lesson in a "new world": the current data is far more important than anything the Federal Reserve says!
This was fully demonstrated after last week's Super Wednesday. On the morning of that day, the May CPI growth rate in the United States was lower than expected, triggering the largest upward trend in the US bond market this year.
Less than six hours later, the upward trend slightly weakened after the Federal Reserve's latest chart forecast predicted only one rate cut this year. But soon on Thursday, the unexpected decline in PPI and the increase in initial jobless claims further indicated a easing of inflationary pressure, and US Treasury bonds continued to expand their upward momentum.
The 10-year US Treasury yield, known as the "anchor of global asset pricing," ultimately closed around 4.2% last Friday, falling 21 basis points throughout the week, marking the largest weekly decline since mid December last year.
In short, the dovish inflation data drowned out the hawkish voices of the Federal Reserve last week
As the recent decline in economic data continues to surprise everyone, including central bank policymakers, these changes highlight the diminished importance of Federal Reserve guidance. Federal Reserve Chairman Will also acknowledged this at last week's post meeting press conference and stated that the Federal Reserve will pay attention to the direction of the data.
This may also mean that with the release of more key data and a reassessment of interest rate prospects, the bond market may continue to be full of ups and downs in the future. The current trend of data cooling is certainly promising, but whether it can continue remains to be seen. At a time when the market no longer trusts Federal Reserve officials' forward-looking guidance on interest rates, any unexpected performance in economic data could trigger market turbulence.
Jean Boivin, head of BlackRock Investment Research, said, "Federal Reserve decision-makers will continue to speak, but in the current environment, the impact of their speeches will be somewhat diminished. This is an environment that overreacts to macro data."
Undoubtedly, the recent series of economic data released by the United States has actually unconsciously strengthened investor confidence - they now believe more that the Federal Reserve will start cutting interest rates later this year. According to data from the derivatives market, traders expect the Federal Reserve to implement two 25 basis point interest rate cuts this year, with the first expected as early as September.
This is undoubtedly more dovish than what Federal Reserve officials predicted in their latest June chart - their median forecast is one rate cut this year, lower than the three expected at the March meeting.
With the expected changes in relevant interest rates, a large amount of funds are currently flowing into stocks that benefit from lower borrowing costs. According to data compiled by EPFR Global and Bank of America, the inflow of funds into the US technology sector reached $2.1 billion last week, the highest level since March.
From a historical perspective, interest rate cuts mark a crucial turning point, as they will bring strong stock returns. Of course, this is limited to cycles like this one that are not caused by economic recession (at least for now). This also explains why the latest cash flow data from Bank of America and EPFR Global shows that a large amount of funds are flowing into three important industries closely related to the economy - finance, raw materials, and utilities - which are expected to benefit from interest rate cuts as long as economic growth is strong.
At the same time, fund managers are also increasing their investment in technology stocks. The Nasdaq 100 index rose 17% in 2024. According to data compiled by Bloomberg, the average P/E ratio of the seven largest companies in the S&P 500 index is about 36 times, while the benchmark index's P/E ratio multiple is only about 22 times.
Looking ahead to this week, the tense nerves of market participants may be expected to temporarily relax - as the important performance of no data is comparable to the employment and inflation reports of the past two weeks. Of course, many officials from the Federal Reserve will take turns appearing this week, which is also something they have often done after interest rate meetings in the past. But as we mentioned above, the influence of Federal Reserve officials' speeches now seems to be less important than what is reflected in actual changes in economic data.
Terry Sandven, Chief Equity Strategist at Bank of America Wealth Management, said that if the Federal Reserve can also adopt a dovish stance in the future, market defense corners such as consumer goods and real estate that can pay stable dividends will become more attractive.
For the stock market, June is usually a calm period, and trading volume will decrease after entering summer. However, investors may still need to be wary of one thing before the weekend this week - the upcoming quarterly "Four Witches Day". This Friday, stock index futures, stock index options, individual stock futures, and individual stock options will expire simultaneously, combined with quarterly rebalancing of some indices. This convergence often leads to a period of high market volatility and high trading volume. Therefore, this may disrupt market positions in the short term.
"The stock market may be quite volatile in the coming week," said Frank Monkam, senior portfolio manager at Antimo