Last week, the three major US stock indexes adjusted across the board, and the path to achieving the 2% inflation target was not as smooth as market expectations. The strong comments from Federal Reserve officials also prompted the outside world to adjust their previously optimistic interest rate outlook.
In the coming week, as the market continues to play games on the prospects of the Federal Reserve's policies, the performance of technology stock leader Nvidia in this round of the market will become the focus, which may determine whether the technology industry will experience profit taking or the beginning of a new round of the market.
The easing prospects of the Federal Reserve have cooled down
The major economic data for the United States released last week was mixed. The monthly retail sales rate in the United States unexpectedly declined by 0.8% in January, which was lower than market expectations. At the same time, the data for December last year was also revised down. As an important component of consumer spending, this may be a significant sign of pressure on the US economic momentum.
However, while the Federal Reserve's monetary policy has brought pressure to the economy, the anti inflation process has unexpectedly experienced fluctuations. Affected by rising rent and service industry inflation, the US Consumer Price Index (CPI) rose 0.3% month on month last month, while the core CPI growth rate remained above 3.0% year-on-year. At the same time, upstream cost pressures are also heating up, with the January Producer Price Index (PPI) representing wholesale costs reaching its largest monthly increase in nearly a year.
Inflation often occurs at wholesale prices and then spreads to consumers, which will continue to raise concerns about prices. Bob Schwartz, senior economist at the Oxford Institute of Economics, said in an interview with First Financial reporters that price increases are more widespread than before, mainly driven by the sticky component of core CPI. On the other hand, there are not obvious signs of supply chain disruptions and rising commodity prices. He analyzed that the transfer of transportation costs has not yet translated into significantly higher commodity prices, but potential upward risks need to be prevented.
Tiffany Wilding, Managing Director and Economist at asset management giant PIMCO, believes that the market is becoming increasingly concerned that inflation may reignite. "The path for the Federal Reserve to achieve its 2% (US) inflation target will not be just bumpy. Investors and policymakers may have completely misjudged the power of inflation, although it will take at least a month of data to prove this," he said
The yield of medium - and long-term US Treasury bonds rebounded again, with the 2-year Treasury bond closely related to interest rate expectations rising 16.8 basis points to 4.67% on a weekly basis, and the benchmark 10-year Treasury bond rising 10.8 basis points on a weekly basis, approaching the 4.30% mark, rising 26 basis points in the past two weeks. The federal funds rate futures show that the time window for the first rate cut has been further postponed to June, and the space for the Federal Reserve to cut interest rates throughout the year has been reduced to four times, compared to six times at the beginning of the year.
Federal Reserve officials have repeatedly emphasized the need to remain cautious in their policy stance. Atlanta Fed Chairman Mary Daly believes that three rate cuts are a "reasonable benchmark", and considering the risk that some factors that suppress inflation may gradually disappear or even reverse, the Fed should not be in a hurry before rate cuts. "We need to resist the temptation to take quick action when patience is needed, and be prepared to respond flexibly with economic development." She said that more work needs to be done to achieve sustainable price stability.
Schwartz told First Financial that for the data dependent Federal Reserve, economic indicators suggest that the future easing cycle may be gradual, which may disappoint investors who expect quick rate cuts. "But as the volatility of the money market shows, it is still too early to judge when a policy turning point will occur." He believes that the Federal Reserve will continue to focus on the job market and wage data, and the first half of the year may still be the starting point for policy easing.
US stocks may face short-term direction choices
Due to the expected decline in interest rate cuts, all three major stock indices have ended five consecutive weeks of gains.
From the perspective of sector performance, the technology industry has experienced the largest decline in the past week, falling by 2.5%, followed by the communication services sector, falling by 1.6%. In addition, non essential consumer goods have fallen by 0.8%. These three major sectors have also performed the best this year, benefiting from the high expectations of the Federal Reserve's easing.
From the perspective of capital flow, the optimistic fourth quarter profit stimulus has driven funds into US stock funds, and investors have not been intimidated by the uncertainty of the timing of the Federal Reserve's interest rate cut for the time being. According to statistics from the London Stock Exchange (LSEG), US stock funds had a net inflow of $6.78 billion last week, the largest weekly net buy since December 2023. Meanwhile, US money market funds suffered a net sell-off of $17.56 billion, reaching a new high in nearly four weeks.
The latest monthly global fund manager survey conducted by Bank of America shows that the "Big Seven" technology giants have once again become the most crowded trades to long. For the future leaders of US stocks, 41% of respondents believe they will be large cap stocks.
Mark Hackett, head of investment research at Nationwide, said that although inflation data and the statements of Federal Reserve officials have cast a shadow over the first half of the year's interest rate cuts, it is remarkable that the market has remained stable after experiencing a mid week plunge, which is not easy.
Jiaxin Wealth Management wrote in its market outlook report that the market has been mainly affected by inflation data in the past week, with the Panic Index (VIX), which measures market volatility, reaching a new three-month high. The optimistic view remains that the US economy is stronger than expected, which will translate into higher corporate profits and subsequently into stock prices. The long-term growth story of artificial intelligence may also contribute to profit growth, as evidenced by strong profit reports in the technology industry.
The institution believes that the biggest highlight of the next week will be Nvidia's financial report, which may exacerbate market volatility. If the performance falls short of market expectations, it will become a catalyst for profit taking in technology, especially in the fields of artificial intelligence and chips. Adding to the further increase in bond yields, there will be doubts about whether US stocks can still face it calmly. Of course, if Nvidia performs better than expected, it will drive a new round of investor fear of missing out on the technology industry.