① This week's Powell's press conference has sparked strong reactions in the capital market, but it has also raised concerns about being "overly optimistic"; ② With the sharp increase in market heat, the three Federal Reserve officials who appeared on Friday have all made some efforts in expected management; ③ It is currently unclear when Powell will make his next appearance, but the minutes of this meeting will not be released until early next year.
With the closing bell of the US stock market ringing this week, Wall Street traders and analysts have also entered the traditional "Christmas holiday time". However, at this critical moment, the Federal Reserve has entered a "crisis public relations" mode.
The origin of the matter is exactly Federal Reserve Chairman Powell.
Powell was misunderstood again?
After the Federal Reserve released a more dovish interest rate resolution and a "dot matrix" outlook on Wednesday this week, Powell, who has been talking nonsense for the past two years, went against the norm and publicly stated at a press conference:
The question of when it is appropriate to gradually reduce the current restrictive policies has begun to enter our vision and has clearly become a topic of discussion in the outside world, which is also the topic of our meeting today.
This statement has also caused a stir in the market - who would have thought that Powell, who has only been muttering "inflation is too high" and "it depends on data" for over a year, would openly talk about interest rate cuts?!
According to statistics, including the day of Powell's speech, the total value of US stocks and bonds skyrocketed by $2 trillion in just three days. If calculated from the last Federal Reserve meeting in November, the net value of US stocks and bonds has increased by $7 trillion.
This matter also has external benefits - the net value of the global stock and bond markets increased by $4 trillion this week, and starting from early November, the net growth can reach $15 trillion.
The speech by the Federal Reserve Chairman driving the stock market up should be a good thing in most cases, but this week's situation may have gone too far:
After Powell's speech, the market once raised the expectation of a rate cut in 2024 to nearly 170 basis points, equivalent to a 25 basis point rate cut for every Federal Reserve meeting starting from March next year;
The S&P 500 index has risen for 7 consecutive weeks, breaking the record for consecutive gains in nearly 6 years (since November 2017);
After Powell's speech, up to 49% of the S&P 500 index's constituent stocks were in an overbought state, a situation not seen in US stocks since February 1991.
What's even more remarkable is that the Russell 2000 index, representing small cap stocks in the US, has also experienced a rise from a new low in the past year to a new high in less than 50 days. Since the birth of this index in the 1980s, there has never been such a drastic increase.
Against the backdrop of a gradual slowdown in the US economy in the coming quarters (as stated by the Federal Reserve), the rise in US stocks is more likely to point to higher valuations, and the sustainability of the gains depends on whether subsequent corporate profits can keep up. But currently, except for a few star stocks with products in short supply such as Nvidia, even Apple, a leading US stock company, dare not express optimism about next year's performance.
More importantly, despite emphasizing the importance of data, the US economic data did not provide any evidence to support the Federal Reserve's significant shift - the magnitude of inflation decline was moderate, and the recently released non farm payroll report was even stronger than expected.
Regarding this, Caixin News also mentioned in yesterday's report the market's doubts: what kind of data is the turning pigeon looking at, and is it not Biden's approval rate?
Given that Powell also mentioned a "slowdown in interest rate hikes" in July last year, which led to a sharp rise in the stock market, and then ended tragically with the "black 8 minutes" of the Jackson Hole annual meeting at the end of August, whether his intentions were misunderstood by the market may only be clarified in his next public appearance.
Judging from the state of at least three officials who spoke on Friday in a row, the Federal Reserve may not be satisfied with the market's movements in recent days.
Williams, Bostic, and Goolsby shouted one after another
The first person to appear last night was New York Fed Chairman Williams, who, as the "third person" in the Fed system, threw a "straight ball" that refuted Powell:
Williams stated that "there is no real discussion of interest rate cuts at the moment," while emphasizing that he believes that "it is too early to think about rate cuts themselves." If inflation stagnates or reverses, the Federal Reserve needs to be prepared to further tighten policy.
Subsequently, Atlanta Fed Chairman Bostic also hinted with a slightly indirect tone that interest rates would only be lowered twice in 2024, and the first rate cut would be after the third quarter.
Bostek "does not believe that lowering interest rates is an urgent matter," and he said that decision-makers still need "a few months" to observe enough data and gain confidence that inflation will continue to decline.
The most dovish among the three was Chicago Fed Chairman Goolsby, whose speech focused on "not ruling out any possibility," which was clearly not as dovish as the market had imagined.
Gullsby predicts that interest rates next year will be lower than current levels, but not significantly lower. He emphasized that as inflation decreases, it is necessary to consider the restrictive nature of current policies and whether policies should be relaxed. But if we stop receiving good news and inflation fails to move towards the target, then the Federal Reserve should be prepared to raise interest rates.
After the trio played a "combination punch", the market's pricing for the March interest rate cut next year has converged, and international gold prices have also experienced a dip in the late trading stage. However, the more closely watched 10-year US Treasury bond yield has limited volatility, closing below 4% for the first time since August this year.
(International Gold Price Trends, Source: Trading View)
For Wall Street, it is not necessary to wait too long to understand the attitude of Federal Reserve officials. According to convention, the minutes of this week's meeting will be released in three weeks, which is Wednesday in the first week of 2024 (early Thursday morning Beijing time). But before that, the market could only speculate on a moderate holiday season for about ten trading days.