Red Weekly Special | Weller

In the early morning of February 2, Beijing time, the Federal Reserve announced that it would raise interest rates by 25 basis points (BP) as scheduled, but to the market's surprise, Federal Reserve Chairman Powell mentioned for the first time that "the anti-inflation process has begun".

Although Powell said at the press conference that "interest rates should continue to be raised" and that it is not suitable to cut interest rates during the year, the stock market rose, the Nasdaq outperformed other major stock indexes, bond yields fell and the US dollar weakened. Traders even began to expect to cut interest rates by 50 basis points by the end of the year. In the economy, anti-inflation means that the inflation rate begins to decline, but at this time, the economy is still in a state of inflation.

It should be noted that the downward trend of inflation will not be smooth sailing. The most stubborn part of inflation is "super-core inflation", that is, the inflation of core services (excluding housing, medical care and other indicators), and the tight labor market keeps wages high. In the key statement, the Fed said that it was appropriate to "keep raising interest rates", which indicated that it might raise interest rates several times (March and May), and many traders thought that the Fed would suspend interest rate hikes after the next meeting in March. We think it is certain that there will not be only 1 interest rate increase this year, and the probability of interest rate reduction during the year is not as high as the current market thinks.

It is still possible to raise interest rates twice this year.

Traders pay attention to "core service industry" indicators

The interest rate resolution of June 5438+ 10 was in line with expectations, and the market has fully included the interest rate increase of 25BP to 4.50%-4.75%. However, we soon noticed that there was something surprising in the statement: the Fed said in its key statement that "continuous interest rate hike" was appropriate, which indicated that it might raise interest rates several times (March and May).

In addition, the statement also pointed out that inflation has "eased" but remains high, which reflects the Committee's belief that more work needs to be done before the price pressure completely subsides. Finally, the statement fine-tuned the wording, acknowledging that the Ukrainian conflict is contributing to "increasing global uncertainty" and deleting "upward pressure on inflation and pressure on economic activities".

Contrary to the past, Powell's attitude at the press conference was "softened", which completely reversed the initial market trend after the release of the monetary policy statement. At the press conference, Powell told the story according to the script, which was mixed with hawkish and dovish remarks, such as "We will basically keep a tight stance for a certain period of time", "Inflation has slowed down in the past three months, which is a welcome change", "We need more evidence to confirm that inflation is on a downward trend", "The terminal interest rate in June 5438+February is likely to be higher than our expectations" and "We".

In short, Powell confirmed his expectation of the central bank to raise interest rates at least twice, but he admitted that "the anti-inflation process has begun", so traders are more convinced that there are only two interest rate hikes this cycle, and the Fed will stop raising interest rates in the second quarter. At the same time, he repeatedly emphasized "core services (except housing)", providing traders with a clear inflation indicator to assess whether the central bank will take any action in the coming months.

The Fed, which hopes to pursue victory, will not "let go" too early, because the emergence of doves too early will lead to the relaxation of the financing environment again, which will not be able to curb inflation quickly.

Market risk sentiment heats up

Traders set a price for cutting interest rates by 50 basis points at the end of the year.

After the interest rate was announced, the market first made a mild "risk aversion" reaction (the stock index fell and the dollar rose), but everything quickly reversed. The market seems to think Powell's press conference is more moderate than expected.

The dollar fell 50- 100 points against all major currencies. On May 30, 2022, the US dollar index once fell below the horizontal support level 10 1.29, and the next support level was at the psychological integer support level 100.00. Below this point, the price may fall to the support level of 99.42 in March 2022. In order to reverse the decline, we have to return to the high point of 65438+ 10/0/0 above/kloc-0.60. The next resistance is at the high point of1October 12 103.29.

At the same time, the yield curve of all maturities of U.S. Treasury bonds is falling, and the yield of two-year Treasury bonds, which has attracted much attention, has fallen by more than 10 basis point to 4. 12%. In fact, traders in federal funds futures expect to cut interest rates by 50 basis points by the end of this year. Gold rose 12 points to 1958 USD, and major American stock indexes showed a rebound trend, especially the Nasdaq 100 index rose 1.5%.

In fact, the year-to-date increase of U.S. stocks has exceeded 10%, among which the Nasdaq index is among the top gainers, with the increase approaching 15%. In 2022, the technology stock index plummeted by more than 30%.

Of course, concerns about the current profit recession are still frequently mentioned by many institutions, and Morgan Stanley frequently issued warnings earlier. About 80% companies in the Standard & Poor's 500 are experiencing faster cost growth than sales revenue, and the pressure on profit margins is worsening, which is likely to lead to the first negative earnings per share growth since the epidemic recession this quarter. At the same time, the agency's revision of the quarterly forecast is declining, and the model indicates that there will be more substantial downturns in the future. To make matters worse, however, in previous earnings recessions, the Fed has been cutting interest rates, but this time it has not.

So is the current rebound of US stocks a reasonable reflection of the expectation of a "soft landing", or is it just another "bear market trap"?

We believe that the US stock market may continue to be supported in the short term, driven by the decline in yield, the weakness of the US dollar, the gradual moderation of the Federal Reserve and the lack of investors' positions. So far, this earnings season has not caused major concerns. Although the risk of profit recession is rising, it seems that now is not the time to worry, and the recession will be the focus in the second quarter of 2023.

In addition, the recent sharp rebound in the market may also be due to investors' fear of falling behind or missing (FOMO) and temporarily ignoring the expectation of falling profits.

The data shows that active investment managers have once again significantly increased their risk exposure. The seasonal effect of 1 month is also crucial, which will boost the worst-performing stocks in the previous year. On June 5438+February last year, the most serious "tax loss selling" occurred in many years, that is, the underperforming stocks were sold at the end of the year to reduce or reduce the capital gains tax. The rebound of 65438+ 10 was also led by the biggest laggard last year, and the performance of Nasdaq in the past month far exceeded that of Dow and Standard & Poor's 500.

(Matt Weller is the global research director of Jiasheng Group. This article was published in Red Weekly on February 24th, 65438. The views in this article only represent the author's personal views and do not represent the position of Red Weekly. )