Since March, the overall performance of US stocks has been poor, with fluctuations in interest rate expectations triggered by economic data and weak performance of star technology stocks hitting investor confidence and upward momentum.
In the coming week, the market will face multiple tests, and the latest decision of the Federal Reserve may trigger a repricing of interest rate paths, further affecting risk appetite. At the same time, whether Nvidia can ignite market confidence again with GTC is also a major focus. With the market volatility index (VIX) rebounding more than 10% from its low point at the beginning of the year, the market volatility risk behind the trend of star cap stocks needs to be given sufficient attention.
The suspense of interest rate cuts in June resurfaces
With the release of the latest inflation data, the shift in the Federal Reserve's monetary policy may be postponed again.
Due to the increase in gasoline and housing costs, the Consumer Price Index (CPI) in the United States steadily increased in February, with a month on month increase of 0.4%. Among them, gasoline prices rebounded by 3.8%, contributing more than 60% of the month's increase to housing rent.
The pressure on upstream enterprises has also increased. In February, the Producer Price Index (PPI) increased by 0.6% month on month, doubling from January, and the year-on-year growth rate accelerated to 1.6%. Affected by energy and food, commodity prices have risen by 1.2%, accounting for nearly two-thirds of the PPI increase. This indicates that the main driving force behind the previous decline in inflation - commodity deflation - is reversing, but the service industry has not effectively alleviated price pressures. Similar to the CPI report, sub service industry indicators such as tourism, hotels, and medical prices are still continuing to rise.
Based on the latest price data, institutions predict that one of the inflation indicators that the Federal Reserve is most concerned about, the Consumer Expenditure Price Index (PCE) for February, may rebound to 2.8%. Bob Schwartz, senior economist at the Oxford Institute of Economics, said in an interview with First Financial reporters that it is clear that inflation indicators will not provide confidence to Federal Reserve members that inflation is moving towards a sustainable 2% target, thereby reducing the likelihood of interest rate cuts in the first half of the year. He specifically reminded us to pay attention to the inflation trend in the service industry, as the super core CPI is still at a high level, and Federal Reserve Chairman Powell has previously emphasized the importance of super core prices.
The mid to long term US bond yields have risen in response, putting pressure on previously optimistic expectations of easing. The 2-year US Treasury bond, closely related to short-term interest rate expectations, rose 23.4 basis points per week to 4.72%, marking the largest weekly increase since January this year. The benchmark 10-year US Treasury bond has returned to the 4.30% mark.
Federal funds rate futures show that traders expect the Federal Reserve to remain stagnant, with the probability of a rate cut in June falling below 60%.
Michael Gapen, Chief Economist of Bank of America Securities, predicts in a report that the Federal Reserve will adjust its outlook forecast to support stronger growth and stubborn inflation, while the unemployment rate remains at its lowest point in recent decades. "Although the market will still be guided to prepare for a rate cut cycle, the risk is a delay." Powell may argue that, given recent inflation data, the committee's confidence in the March inflation outlook is not as good as in January. The January and February CPI reports have slightly lowered confidence and challenged the loose outlook for June. Nevertheless, the committee believes that a broader anti inflation trend still exists. "
Schwartz told First Financial that although the Federal Reserve has made significant progress in reducing inflation, there are increasing signs that the challenge of the "last mile" is even more daunting. The unexpected consecutive upward trend of CPI may force the Federal Open Market Committee (FOMC) to rethink and slow down the pace of discussions. He believes that the Federal Reserve's attention may shift back to the risk of early interest rate cuts, causing inflation to rebound and policy fluctuations, thereby bringing greater impact to the economy.
Schwartz predicts that compared to before, the Federal Reserve may be more neutral in its policy stance, while continuing to emphasize the possibility of interest rate cuts later this year, provided that economic data is coordinated. He believes that data dependence will continue to be the key to future FOMC policy decisions, and from indicators such as the labor market and consumer spending, the Federal Reserve also has enough space to observe the lagging impact of monetary policy.
Market volatility risk
Last week, the US stock market continued its narrow range of volatility with a slight downward shift in focus. The outside world is waiting for the latest clues on the Federal Reserve's monetary policy, but inflation indicators have planted some doubts in investors' minds that the Federal Reserve may further delay the start of the easing cycle.
The reporter from First Financial News noticed that technology stocks, which have shown strong performance since the beginning of this year, have continued to fluctuate recently. Affected by policies and risk appetite, the Philadelphia Semiconductor Index experienced its largest weekly decline in nearly two months. Several chip stocks, including AMD, have performed poorly, and Nvidia, the biggest focus in the past two years, has also experienced multiple intraday dips, indicating a divergence in funding positions.
Benjamin Melman, global chief investment officer of Edmond de Rothschild Asset Management, believes that although the risk of inflation in the United States cannot be ignored, the foam in the U.S. stock market is not large. "The AI boom and the Internet foam have one thing in common: huge earnings growth expectations. But today's difference is that at least some preliminary earnings momentum has proved that this enthusiasm is reasonable. Nvidia's P/E ratio for 2024 is about 36 times, which is a high requirement for a high growth stock, but it is not impossible to achieve
Many markets have turned their attention to the Nvidia GTC Developer Conference, which will be held from March 18th to 21st, hoping to ignite a new wave of artificial intelligence fever. Wall Street expects Nvidia to launch a new B100 chip and discuss broader market opportunities for accelerated computing. Bank of America has raised Nvidia's target price to $1100, stating that the valuation still looks attractive and that GTC may continue to seize market opportunities. Wedbush analyst Matt Bryson wrote, "Friendly reminder, the transition from A100 to H100 has caused Nvidia's stock price to more than double.".
However, it also holds a cautious view. Jordan Klein, an analyst at Mizuho Securities, said it is necessary to pay attention to whether GTC can bring enough surprises to the outside world and provide investors with profit opportunities. If it falls short of market expectations, the fatigue of enthusiasm for artificial intelligence may lead to a new round of market selling, and Nvidia's trend in the past week indicates that investors' appetite is increasing.
Jiaxin Wealth Management wrote in its market outlook that as inflation triggers fluctuations in interest rate expectations, the stock market has experienced turbulence. This year's inflation data has proven to be more sticky than expected, leading to the Federal Reserve's interest rate expectations pointing towards longer term high levels. It should be noted that the Philadelphia Semiconductor Index and NASDAQ 100 Index have shown signs of bearish reversal within the day.
The agency believes that investor sentiment may change at any time in the short term. "From a bullish perspective, the foam in the semiconductor field has weakened, and Nvidia's GPU may rekindle bullish interest. On the other hand, the yield of U.S. bonds is rising, and investors' optimism for interest rate cuts is weakening. This is a contest between the two forces, which may become a source of a new round of volatility."