Last week, Federal Reserve Chairman Powell's speech brought a frenzy to global stock markets. At the annual global central bank economic seminar held in Jackson Hole, Wyoming, Powell stated that the time has come to cut interest rates, as job market risks have risen and the latest remarks have brought September's rate cut closer to reality.
Now that the three major stock indexes have regained the lost ground caused by the recession panic at the beginning of the month, can loose expectations help the market once again charge towards historical highs.
The Federal Reserve is about to cut interest rates
After the minutes of the Federal Reserve meeting hinted at considering a rate cut in September, Powell's latest speech at the Jackson Hole Global Central Bank Annual Meeting has brought the opportunity for a policy turning point to the forefront.
Overall, the economy continues to grow at a steady pace, but inflation and labor market data indicate that the situation is evolving. As we emphasized in our previous Federal Open Market Committee (FOMC) statement, the upward risk of inflation has decreased and the downward risk of employment has increased. "Powell said in his speech," We are concerned about the risks on both sides of our dual task. The timing and speed of policy adjustments to move forward are clear, and the timing and pace of interest rate cuts will depend on upcoming data, changing prospects, and risk balance
The data from the US Department of Labor earlier last week showed that in the 12 months ending in March this year, the number of new jobs added in the United States decreased by 818000, which is expected to reach a new high since 2009. Recent data also reflects that the US job market has gradually returned to normal levels, and the demand for manufacturing jobs is being severely tested.
Regarding the job market, Powell believes that the nearly one percentage point increase in unemployment rate over the past year is mainly due to an increase in labor supply and a slowdown in recruitment, rather than an increase in layoffs. However, he also emphasized that the Federal Reserve hopes to prevent any further erosion. At the beginning of this tightening cycle, Powell had previously mentioned that labor market "pain" was a necessary condition for controlling inflation, but now this idea has changed.
Bob Schwartz, a senior economist at Oxford Economics, stated in an interview with First Financial News that job growth is not as strong as previously thought, but the initial revision of the non farm payroll benchmark will not have a significant impact on the Federal Reserve's thinking as they are looking backwards. However, he believes that the recent job growth is a concern for the Federal Reserve, as the labor market may become more fragile and job opportunities may not be sufficient to keep up with the growth of the working age population.
The yield of medium - and long-term US Treasury bonds has fallen due to the prospect of easing, with the 2-year Treasury bond closely related to interest rate expectations falling 15.1 basis points to 3.91% and the benchmark 10-year Treasury bond falling 8.6 basis points to 3.81%. Traders have increased their bets on a more significant interest rate cut in September, with a 37% chance of a 50 basis point rate cut expected for Federal Reserve fund futures next month, up from about 25% late last Thursday, but 25 basis points remains the most popular.
James Orlando, senior economist at TD Securities, wrote in a report that although Powell did not make too many concessions on the expected rate of interest rate cuts, there seems to be no reason for a significant 50 basis point rate cut at present.
Schwartz told First Financial that the minutes of the FOMC meeting in July and Powell's speech at the Jackson Hole Global Central Bank Annual Meeting once again made it clear that the Federal Reserve will cut interest rates in September. "From now to then, the labor market data needs a huge negative accident to prove that it is reasonable to cut interest rates by more than 25 basis points." He believes that the Federal Reserve is trying to adjust monetary policy in the data fog, and prudent risk management is to start cutting interest rates, otherwise the weakness of the labor market will become worse. With consumer elasticity and inflation trends gradually returning to the 2% target, expectations for a rapid and significant interest rate cut may fade.
US stocks are expected to continue their upward trend
The expectation of the Federal Reserve cutting interest rates has continued the rebound momentum of the US stock market. According to Dow Jones market statistics, except for the energy sector, all other sectors recorded gains last week, with real estate, materials, and non essential consumer goods sectors rising by over 2%. Industries, healthcare, consumer goods, finance, utilities, and other sectors also rose by over 1%.
Star stocks in the artificial intelligence and technology sectors are showing signs of making a comeback. Chip manufacturer Nvidia rebounded nearly 30% from a low, driving the Philadelphia SE Semiconductor Index back into a technical bull market, and the market is turning its attention to next week's latest financial report.
At the same time, the gradual return of risk appetite has brought the Chicago Board Options Exchange Volatility Index (VIX) back to calm, and the Wall Street "panic index" quickly fell back after hitting a four-year high at the beginning of the month. As of last Friday's closing, the cumulative decline has exceeded 70%, returning to below the long-term average, indicating a return of investors' risk appetite.
The flow of funds shows that a shift in monetary policy is imminent, coupled with strong US retail sales data, optimistic consumer confidence data, and moderate inflation data indicating a solid economic foundation, boosting investor confidence. According to data compiled by the London Stock Exchange (LSEG), investors net bought $5.97 billion in US stock funds last week, reaching a five week high.
UBS Wealth Management stated in a report sent to First Financial reporters that with the labor market cooling faster than expected and inflation continuing to slow down, the Federal Reserve is expected to start cutting interest rates in September, and will cut rates once each at its November and December meetings. If the job market deteriorates or consumer spending significantly weakens, there is a possibility of a 50 basis point interest rate cut in September. It is worth noting that historically, the Federal Reserve's interest rate cuts during non recession periods have often benefited the stock market, so we continue to be bullish on high-quality growth stocks, "wrote UBS Wealth Management.
Jiaxin Wealth Management wrote in its market outlook that the US stock market experienced a pullback last week, but thanks to Powell's dovish speech, the US stock market regained its upward momentum. The policy shift is mainly beneficial for interest rate sensitive areas in today's market, such as the Russell 2000 index. However, investors still need to weather the bearish seasonal environment associated with August and September. In addition, the forward P/E ratio of the S&P 500 index is 21.5, and it may be more difficult to achieve additional upward momentum without raising profit growth expectations.
The institution believes that the focus of the coming week will first be whether the revolving trading will reignite, followed by Nvidia's financial report, which may add some momentum to the technology industry or pour cold water, such as guidance issues (potential impact of Blackwell shipment delays). Overall, the bullish momentum in the first half of the week may continue to be driven by expectations of interest rate cuts, and there may be some fluctuations in the second half of the week due to Nvidia's performance and market reactions.