Boosted by the expected end point of the Federal Reserve's interest rate hike cycle, which has been strengthened by a pullback in inflation and a cooling economy, the US stock market has risen for the third consecutive week, with major stock indices reaching their highest levels in nearly two months and risk appetite improving.
However, the market showed some signs of cooling in the second half of the week, and investors' enthusiasm for interest rate cuts did not receive a positive response from Federal Reserve officials. In the coming week, while playing the monetary policy game, Nvidia's financial reports will become the focus, and technology stocks closely related to interest rate trends may once again become the winners and losers of market direction choices.
Investors run ahead of the Federal Reserve
As the Federal Reserve hesitates over whether further action is needed, economic data is constantly providing assistance.
Affected by the fall in energy prices, inflation pressure in the United States further slowed down in October. The Consumer Price Index (CPI) remained unchanged month on month, reaching a new low in nearly 15 months. At the same time, the Producer Price Index (PPI), which measures upstream costs, unexpectedly fell month on month, marking the largest decline since April 2020. This will also alleviate the driving force for companies to raise service and product prices to consumers.
At the same time, signs of economic cooling are also constantly emerging. As an important component of consumer spending, retail sales in the United States fell by 0.1% last month, marking the first decline since April this year. The inhibitory effect of monetary policy on demand is gradually emerging, and higher borrowing costs and inflation are squeezing household budgets. The latest institutional forecast shows that the upcoming holiday shopping season may become the weakest in five years. The job market has fluctuated, with the number of initial claims for unemployment benefits jumping to a new high in three months, which is the latest evidence of a cooling down in the labor market.
Bob Schwartz, a senior economist at the Oxford Institute of Economics, said in an interview with First Financial reporters that the larger than expected decline in inflation will help establish the foundation for the Federal Reserve to remain on the sidelines for the rest of this year. From the perspective of consumer spending progress, he analyzed that as excess savings gradually decrease, discretionary spending will be suppressed, and retaliatory spending in the service industry may have come to an end.
The yield of medium - and long-term US bonds fell further. The two-year US bonds linked to interest rate expectations fell 15.8 basis points to 4.90% in the week. The yield of benchmark 10-year treasury bond hit a two month low to 4.44%, nearly 60 basis points lower than the high at the beginning of this month. Federal funds interest rate futures show that the market has digested the expectation that the Federal Reserve will no longer raise interest rates, and the probability of holding off at the end of the year and the first meeting next year has reached 100%. It should be noted that investors will further advance the interest rate reduction milestone, which is expected to occur as early as May next year.
In contrast, Federal Reserve officials still haven't made any hints about lowering interest rates. Cleveland Fed Chairman Maester stated that easing monetary policy is not currently part of the discussion. Boston Fed Chairman Collins emphasized that he will not abandon the option of further tightening.
Jim Reid, macroeconomic strategist at Deutsche Bank, warned: "This is the seventh clear example in the past two years that we have seen the market excited about the dove turn, and in the past six times, these dove expectations have been completely lifted." He said that at some point, there will be a true dove turning point, which is now closer than before, but cannot be fully confirmed.
Schwartz told First Financial that his view remains that the Federal Reserve has reached the end of its tightening cycle. However, the expectations of interest rate cuts in 2024 are too optimistic. He believes that although there may be more talk in the coming months about housing and core commodity prices falling to provide energy for anti inflation, this is not enough to convince the Federal Reserve that inflation is continuing to fall to 2%. Schwartz stated that a real decline in inflation will require further softening of the labor market, which may be a long-term matter. In his view, the Fed's decision to cut interest rates will wait until at least the third quarter of next year.
After a strong rebound, bulls need to gather momentum
After the last Federal Reserve resolution, the three major stock indices in the United States have been rising for three consecutive weeks. According to Dow Jones market data, the S&P 500 index rose 9.6% during this period, setting its best performance since June 5, 2020, and moving out of the correction range along with the Nasdaq.
The market's upward trend has gradually spread from large cap stocks to small cap stocks, with the Russell 2000 index rising 5.4% last week. As the "canary" of the economy, small and medium-sized enterprises are more sensitive to changes in the monetary policy environment. As the expectation of the Federal Reserve raising interest rates to a peak intensifies, a valuation level that deviates significantly from the historical average may mean that the future prospects of small cap stocks are more promising.
The flow of funds shows that investors' risk appetite continues to improve. Financial data provider LSEG found that US stock funds attracted a net inflow of $9.33 billion last week, the largest weekly net inflow in nearly nine weeks. Technology industry funds are the main target for investors, with net purchases reaching $1.73 billion, a new high since mid December 2021 and reflecting changes in market interest rate expectations.
The latest fund manager survey released by Bank of America last week also showed that the majority of respondents expect a soft landing in the US economy, and large technology stocks are expected to start a new bull market. Institutions have lowered their cash levels from 5.3% to a two-year low of 4.7%, with 61% expecting bond yields to decline, the highest on record.
After a significant short-term rebound, some market participants believe that US stocks may face some selling pressure and adjustment pressure. Mark Newton, Director of Technology Strategy at Fundstrat, welcomed the recent increase in more sectors. He said that this improvement in breadth may create conditions for the index to rise. But he cautioned cautiously that, based on certain indicators, stocks are beginning to show overbought behavior, and "the short-term risk/return of the US stock market will not be so positive until further gains are made
Keith Lerner, Co Chief Investment Officer of Truist Advisory Services, said that the stock market did not see widespread selling pressure, but a rebound would require "some breathing". He believes that there are some risks in market trading when focusing on small cap stocks and cyclical sectors such as energy, finance, and industry in the S&P 500.
In the market outlook report, Credit Suisse wrote that bulls still dominate, investors get inflation data, and Wal Mart, Cisco and other companies send cautious signals, which provide conditions for the Federal Reserve to end the cycle of interest rate increases and achieve a soft landing. The bank believes that the focus of the next week will shift to the technology sector and Nvidia, which represents the leader in the long-term growth story of artificial intelligence and is one of the pillars of the bull market. On the other hand, as Thanksgiving approaches, market trading volume will shrink, leading to an increase in volatility risk.