Is the return of US stock funds a flash in the pan?
Entering May, the US stock market has returned to the right track. Despite widespread caution among Federal Reserve officials regarding interest rate cuts, the market still sees recent weak US economic data as a strong signal to drive policy easing.
As risk appetite recovers, the panic index VIX, which measures market volatility, is approaching its low point for the year. In the next week, the United States will release key inflation data, which may once again affect the judgment of the Federal Reserve’s interest rate cut node, thereby triggering a new round of market volatility.
(“Has the expectation of the Federal Reserve’s interest rate cut been clarified? (Source: First Financial Photo)”,)
Inflation expectations add pressure to the Federal Reserve
There have been increasing signs of loosening in the US labor market recently. According to data from the US Department of Labor, the number of initial jobless claims in the United States unexpectedly rose to 231000 last week, a new high since the end of August last year. At the same time, the weekly increase of 21000 also broke the high since January this year.
Just a week before this, the growth rate of non farm employment in the United States in April fell to a new low in nearly half a year, and sentiment surveys including the Institute for Supply Management (ISM) and the Federation of Independent Business (NFIB) also showed a sharp slowdown in the labor market.
Bob Schwartz, senior economist at the Oxford Institute of Economics, said in an interview with First Financial reporters that the recent performance of the job market has raised concerns about the health of the US economy. “The elasticity of consumer spending depends on a strong household balance sheet and a strong labor market.” He further analyzed, “Usually, the latter starts to shake, and we can only see significant signs of economic weakness.”
The latest statement from Federal Reserve officials remains cautious, as the conditions for a possible interest rate cut are considered immature. Many local Federal Reserve chairpersons have emphasized caution towards inflation and patience in policy decisions in their speeches, with two hawkish representatives – Minneapolis Federal Reserve Chairman Kashkali and Federal Reserve Director Bauman – even believing that interest rates will not be lowered this year.
The trend of prices will therefore become crucial, as the US Department of Commerce is about to release its April Consumer Price Index (CPI) report. According to a consumer survey conducted by the University of Michigan, respondents believe that inflation, unemployment rates, and interest rates may all develop in unfavorable directions over the next year. The one-year inflation expectation rose to 3.5%, and the five-year inflation expectation rose to 3.1%. Will Baltrus, deputy economist at the consulting firm, commented on the recent US job market, stating that since the pandemic recession, the labor market has experienced a very strong period of growth and is beginning to show signs of cooling. However, due to employers still facing labor shortages, it is unlikely that there will be a significant amount of unemployment in the coming months.
The yield of medium – and long-term US Treasury bonds reached a new week high, with the 2-year US Treasury bond closely related to interest rate expectations rising to 4.87%, and the benchmark 10-year US Treasury bond nearing the 4.50% mark in late trading. According to data from the Chicago Mercantile Exchange’s Fed Watch Tool, the probability of a rate cut in September is around 50%, and the pricing for the annual rate cut is still less than twice.
Schwartz told First Financial reporters that he expects the economy to gradually slow down in the second half of the year, and he still favors September as an important reference point for the potential interest rate cuts by the Federal Reserve.
May volatility intensify?
The three major US stock indexes continued their strength last week, with the Dow Jones Industrial Average rising for eight consecutive days and once again approaching the 40000 point mark. The S&P and Nasdaq achieved three consecutive weekly gains, igniting investors’ risk appetite for interest rate cuts. According to FactSet data, the Cboe volatility index VIX has fallen below the 13 mark, approaching a new low for the year.
At the same time, the overall performance of corporate financial reports remains impressive. According to Dow Jones market statistics, 77% of the 459 companies in the S&P 500 index have better profits than market expectations. Analysts currently predict that the net profit of the US stock market in the first quarter will increase by 7.3% year-on-year, a significant improvement from 5.1% at the beginning of last month.
The flow of funds shows that US stock funds have experienced their first weekly inflow in six weeks. According to data provided by the London Stock Exchange (LSEG) to First Financial reporters, investors have bought a net $1.14 billion US stock fund this week in the past week, with large cap stocks continuing to be the focus of capital pursuit. Recently, technology giants represented by Apple, Microsoft, Amazon, and Nvidia have once again launched an attack on historical highs.
However, a reporter from First Financial News noted that the weak consumer sector may indicate the challenges faced by American households, with companies including McDonald’s, Shake Shack, Starbucks, and KFC’s parent company Yum! Brands reporting weak sales growth in the first quarter.
Mike Wilson, a star analyst on Wall Street and chief US stock strategist at Morgan Stanley, believes that as the economy sends mixed signals, investors should buy defensive sectors such as consumer essentials. He said, “Overall, we can describe the consumer background as a fork between high-end stability and low-end weakness. If corporate activity indicators further slow down, it may even consider increasing exposure to defensive sectors such as utilities and essential goods.”
Jiaxin Wealth Management wrote in its market outlook that based on weak employment data and evidence from comments from corporate executives, consumers are cutting back on spending, indicating that the economy may eventually slow down, but to what extent? It’s too early to say now, but the bull market scenario is that the recent slowdown is enough to bring inflation down to the Federal Reserve’s target, but not enough to harm corporate profits.
The institution believes that volatility may intensify this week as the market faces two key indicators of inflation and retail sales. Given that the S&P 500 index is approaching its previous high, if inflation and consumption are hot, the market may once again experience panic and short-term jumps. On the contrary, if both meet expectations, the market may experience slight gains and high volatility.