The US stock market has had an unfavorable start to the new year, with investors suddenly becoming cautious at the beginning of 2024. Money market funds have once again gained favor, and people are waiting for further clarification on when and how quickly the Federal Reserve will start cutting interest rates. For the market, the next challenges will come one after another, with inflation data, financial reporting season, and other factors becoming major disruptions to the US stock market before this month's interest rate decision.
The Federal Reserve may become more patient
As the most crucial data from last week, the US non farm payroll report in December exceeded expectations, adding 216000 new jobs and maintaining the unemployment rate at a recent low of 3.7%. The salary growth rate continues to be hot, with a year-on-year increase of 4.1%, an increase of 0.1 percentage points from November last year. The number of initial jobless claims announced earlier also dropped to around the 200000 mark, indicating that the job market remains resilient.
However, the slowing expansion of the service industry has sounded an alarm for the US economy. According to data from the Institute for Supply Management (ISM), the non manufacturing PMI fell from 52.7 in November last month to 50.6, the lowest value since May and approaching the boundary between prosperity and decline. The service industry accounts for more than two-thirds of the US economy, and the employment index in its sub indicators has dropped to its lowest level in nearly three and a half years.
Bob Schwartz, senior economist at the Oxford Institute of Economics, said in an interview with First Financial News that although the overall employment data performed well, there were some issues with the details. From the perspective of the Federal Reserve, accelerating income growth and decreasing labor force participation are not good phenomena. He believes that considering factors such as strikes and holidays, there is a lot of "noise" in the year-end data. "As the impact of monetary policy becomes apparent, the relaxation of the labor market in the future will gradually become apparent."
A series of data also suggests that the Federal Reserve may remain patient in its future policy stance. In fact, in the minutes of last December's meeting, policymakers had significant disagreements on the future interest rate path. Although some Federal Reserve officials have not ruled out the possibility of further rate hikes when it comes to the option of lowering interest rates, many members believe that it may be necessary to keep the target interest rate high for a longer period than expected.
Affected by this, the US Treasury yield rose significantly last week and reached its largest weekly increase since October last year. The benchmark 10-year US Treasury bond has returned to over 4.0%, hitting the 4.10% mark at one point during trading. The 2-year US Treasury bond, closely related to interest rate expectations, is approaching 4.40%, the highest level in nearly three weeks. According to the interest rate observation tool FedWatch of the Chicago Mercantile Exchange (CME), the possibility of a rate cut in March this year has fallen from its previous high of nearly 80% to around 60%, and the market is also expected to lower its expectation of more than 5 rate cuts this year.
Baird investment strategy analyst Ross Mayfield believes that the data confirms a strong economy and a soft landing is becoming a reality. From the current situation, May may be a good time to cut interest rates.
Schwartz told First Financial that various signs indicate that the economy has cooled down at the end of the year, but the employment trend ensures that expansion continues. "From the meeting minutes, it can be seen that the Federal Reserve is trying to guide the market, and the timing of the first interest rate hike is still uncertain, which may depend on upcoming inflation and nominal wage growth." He further analyzed that the speed of economic slowdown and job market balance in the future will be the key turning point of the Federal Reserve's policy. Considering the pricing of federal funds rate futures, communication between the Federal Reserve and the outside world still faces many challenges.
The US stock market has a dismal start to the new year
After a nine consecutive positive streak on the weekly chart ending in 2023, the US stock market has had a difficult start to the new year. Among them, the Nasdaq, which performed particularly well last year, set a record for the longest consecutive decline since 2022. The escalating tensions in the Middle East, concerns about overbought stocks and bonds, and panic that the Federal Reserve may not be able to cut interest rates as quickly as expected are all considered reasons for the sell-off.
Steve Sosnick, Chief Strategist at Interactive Brokers, believes that after experiencing a phase rebound, it is not uncommon to see a slight profit taking in the market, and investors are starting to seriously consider the unfavorable factors they will face. "The current mentality is that the market is on a normal rise and fall, somewhat inclined towards hedging."
The flow of funds shows that investors chose to flee on a large scale last week, waiting for further evidence to support the Federal Reserve's expectation of interest rate cuts. According to data from the London Stock Exchange (LSEG), US stock funds had a net weekly outflow of $5.54 billion. Meanwhile, US money market funds received nearly $57 billion in net purchases, the largest weekly record since November 29 last year.
According to the Investment Company Institute, the total assets of US money market funds rose to $5.965 trillion in the first week of the new year, once again breaking the historical record set in December last year.
Regarding changes in the flow of funds in the market, Mark Luschini, Chief Investment Strategist at Janney Montgomery Scott, said, "This is a defensive rotation, indicating that investors are cautious about the stock market. This repositioning in overbought situations seems too early to complete."
Jiaxin Wealth Management wrote in its market outlook that the stock market has started unstable in 2024, with a 9% increase in volatility VIX. The four best performing sectors are healthcare, energy, utilities, and consumer necessity. Last year's best performing information technology and non essential consumer goods came in at the bottom. The question now is, how long will the recent "rotational trading" last?
The institution believes that there will be many factors that will affect the market direction in the coming week, including the start of the financial reporting season, key inflation data, and short-term oversold in technical aspects. As 10-year US Treasury bonds rise above 4%, US stocks may continue to face pressure to adjust. The market may show a trend of low before high, and from recent data, inflation reports have received positive responses from investors. The financial reporting season is also expected to be a catalyst for rebound, and the performance and guidance of the financial sector will be crucial.