Last week, the US stock market ended its continuous adjustment since April, and the strong performance of Google and Microsoft drove technology stocks back, overshadowing the interest rate panic caused by inflation indicators.
In the coming week, the Federal Reserve’s decision will be held as scheduled, and the flow of funds shows that concerns about the prospect of interest rate cuts have caused net outflows from US stock funds for the fourth consecutive week. At the same time, the financial reports of multiple technology companies will continue to test the sustainability of the artificial intelligence boom. Against the backdrop of sustained high US bond yields, uncertainty will continue to plague the US stock market at the end of the month.
(‘Can the US stock market weather the turbulence of April safely? (Source: Xinhua News Agency image)’,)
The Federal Reserve faces new challenges
The data released last week showed that the US economy grew at its slowest pace in nearly two years in the first quarter. Consumer spending remains strong, however, imports have widened the trade deficit, while the slowdown in corporate inventory accumulation and a decrease in government spending have also dragged down GDP.
However, the shadow of inflation has strengthened the market’s expectation that the Federal Reserve will not cut interest rates before September. The Personal Consumption Expenditure Price Index (PCE), which excludes food and energy, grew by 3.7% in the first quarter, far higher than the 2.0% in the fourth quarter of last year. Subsequently released data for March showed that the overall PCE would accelerate by 0.2 percentage points to 2.7%, with a core PCE growth rate of 2.8% excluding volatile food and energy components, which remained unchanged from the previous value.
Bob Schwartz, senior economist at the Oxford Institute of Economics, said in an interview with First Financial reporters that trade accidents have become a drag on the economy. Due to strong consumer demand, the prospect of import growth this year may keep the deficit level high and continue to drag down economic growth, but the impact is expected to gradually decrease. Regarding the inflation outlook, Schwartz believes that the overall PCE in March met expectations, and the first quarter data was mainly affected by seasonal factors at the beginning of the year, with core inflation indicators expected to gradually stabilize. He said,
The upward trend of medium – and long-term US Treasury bonds continues, with the 2-year US Treasury bond closely related to interest rate expectations close to the psychological barrier of 5%. The benchmark 10-year US Treasury bond is at 4.67%, with a cumulative increase of nearly 48 basis points since the beginning of this month. According to federal funds rate futures, the probability of the Federal Reserve remaining stagnant in July is 70%, and the likelihood of a rate cut in September is slightly lower than 60%.
This week, the Federal Reserve will hold a meeting to discuss interest rates. Federal Reserve Chairman Powell made an appearance on the eve of the silent period, stating that intensified inflation may have delayed interest rate cuts, and his views have been supported by several members of the Federal Open Market Committee (FOMC).
According to Olu Sonola, head of economic research at Fitch, recent data has been mixed. If growth continues to slow down but inflation continues to grow strongly in the wrong direction, then the expectation of the Federal Reserve cutting interest rates in 2024 is becoming increasingly unattainable. Jussi Hiljanen, chief strategist of SEB Research interest rates, believes that since the beginning of the year, especially in April, the sharp repricing of the US treasury bond bond market has been driven by a “perfect storm”, in which the strengthening of US macro indicators and the rise of inflation coincided with the hawkish remarks of the Federal Reserve.
Schwartz told First Financial that it is difficult to see the Federal Reserve having enough confidence to quickly cut interest rates. He expects Powell to be asked about inflation and its impact on interest rates, whether the Federal Reserve will consider raising interest rates, and other issues. “Powell is likely to maintain his previous stance of maintaining flexibility in monetary policy and maintaining this year’s interest rate cut.” Schwartz predicts that the Federal Reserve may cut interest rates in September and December this year, respectively.
The market has not yet emerged from danger
Faced with the uncertainty brought by inflation to the Federal Reserve’s interest rate cut, optimistic financial reports from multiple sector companies last week supported the market.
At present, the profit growth rate of S&P 500 index constituent stocks in the first quarter of 2024 is 5.6% year-on-year, which has increased compared to before the start of the financial reporting season. About 78% of corporate reports exceeded analysts’ profit expectations, with the communication services industry accounting for 90% and the technology industry accounting for 88%. The two major sectors also saw the largest gains in the past week, with Nvidia, the leader in the artificial intelligence industry, rising over 15% on the week and expected to recover from losses this month.
Tom Plumb, President and Chief Portfolio Manager of Plumb Funds, said that Microsoft and Google’s profit reports have eased concerns that Meta’s data center and artificial intelligence spending will compress profits. “Google and Microsoft have both stated that based on their current capital plans, they still expect profit margins to expand. This alleviates many of the challenges of data computing growth,” he added.
According to data provided by the London Stock Exchange (LSEG) to First Financial reporters, US stock funds had a net outflow of $1.2 billion last week due to the cooling expectations of the Federal Reserve’s easing. Investors chose to leave for the fourth consecutive week, but the pace of selling has slowed down, providing some support for the optimistic sentiment of large technology companies in the market. The outflow of money market fund funds has reversed, with a net inflow of 5.6 billion US dollars.
In the next week,
Jiaxin Wealth Management stated in its market outlook that the dominant factor for the market rebound is the oversold technical indicators, and another factor is the impressive profit results of large technology companies. Although ASML’s performance is lackluster and Chaowei Computer has not released guidelines to raise concerns about the long-term growth prospects of artificial intelligence, these profit reports indicate that industry investment remains strong.
The institution believes that the market will still be affected by a lot of uncertainty in the future, and investors will continue to search for artificial intelligence technology and investment development from Amazon, AMD, and Chaowei computer financial reports, as well as Federal Reserve resolutions and non farm payroll reports. “Given the market’s recent sensitivity to yield volatility, its trend changes are crucial for the US stock market.”