The downturn in U.S. stocks since the second quarter continues.
Investors digested a series of mixed corporate earnings reports, continued turmoil in the Middle East, and multiple tests of expectations for a Federal Reserve rate cut and a downturn in technology stocks. Fund flows show that U.S. stock funds have just set a record for the largest sell-off this year. As the Federal Reserve enters a period of silence, the market focus turns to the upcoming performance release period for technology stocks, which may also become an important factor in whether the market can stabilize.
The Fed has no intention of cutting interest rates anytime soon
Data released last week showed that retail sales increased 0.7% in March, which was significantly better than market expectations. Retail sales accounted for about one-third of all consumer spending, indicating that consumer spending will continue to boost the economy in the first quarter. In addition, the Philadelphia Fed manufacturing index rose to its highest level in nearly two years.
Bob Schwartz, a senior economist at Oxford Economics, said in an interview with China Business News that the continued resilience of the U.S. economy has been fully demonstrated, and the Federal Reserve also reported a steady expansion of economic activity in its latest Beige Book. . Given the strength of consumers and continued tightening in the labor market, the U.S. economy is expected to continue strong growth throughout the year and continue to raise the possibility that the Federal Reserve will keep interest rates high for longer.
The latest statements from Federal Reserve officials indicate that the prediction of three interest rate cuts this year reiterated in March appears to be too optimistic. Earlier last week, Fed Chairman Jerome Powell said interest rates were likely to remain high for longer than expected due to the “lack of further progress” on inflation so far this year. Williams, the “No. 3” figure in the Federal Reserve and President of the New York Fed, believes that given the strong state of the U.S. economy, he does not “feel the urgency” to cut interest rates.
The defection of “doves” within the Federal Reserve has further strengthened expectations for policy stability. Chicago Fed President Goolsby said on the eve of the start of the silence period that inflation progress has been “stagnant” so far this year and that it makes sense to wait and get more clarity before acting.
U.S. bond yields continue to rise, with the 2-year U.S. bond, which is closely related to interest rate expectations, rising nearly 9 basis points on the week, approaching the key psychological mark of 5%. The benchmark 10-year U.S. Treasury bond rose 11.4 basis points on the week to 4.61%, with three consecutive positive weeks, and a range increase of 42 basis points, which is equivalent to room for two interest rate cuts. Federal funds rate futures show that the probability of a rate cut in June remains at around 20%, with the first rate cut pointing to September or November.
Institutions are also postponing their judgment on the timing of future monetary policy shifts. Asset management giant Oppenheimer said the Federal Reserve may not lower interest rates until after the U.S. presidential election in November. “We maintain that the Fed will cut interest rates in the second half of this year, perhaps not until after the election, to avoid any interest rate cuts by the Fed. Seen as politicized or politically motivated, the Fed will then choose to continue pausing until inflation loses its stickiness.”
Schwartz told China Business News that near-term upside risks to inflation are increasing due to heightened geopolitical tensions in the Middle East and increasing supply chain pressures. Combined with recent statements by key Fed officials, the Fed does not have enough confidence to start cutting interest rates soon. He reiterated his previous view that service sector inflation will trend back down in the future, helped by the eventual softening of rents and slowing wage growth. This will build confidence that inflation will continue to trend downward, and the Fed may begin to lower the rate in September. interest rate.
Market volatility risks still exist
In the past week, market risk appetite has been impacted due to factors such as suppression of expectations for a rate cut by the Federal Reserve. The S&P 500 and Nasdaq have fallen for six consecutive sessions, their longest streak since October 2022.
It is worth mentioning that the chip industry is one of the best-performing sectors this year, driven by the optimistic prospects of artificial intelligence. However, the sector just suffered its largest weekly decline in the past two years, falling 9.2%. Last Friday, Nvidia plunged more than 10%, losing its market value of US$2 trillion, while AMD’s stock price fell 20% because it failed to announce performance guidance as expected.
Mike Dickson, head of research and quantitative strategy at Horizon Investments, said the more unfavorable the interest rate environment looks, the more important earnings growth becomes. “You’ve seen tightening expectations coming out of the market because there’s no data to suggest that rates should be cut. So in this environment, meaning rates aren’t going to come down, P/E ratios aren’t going to expand as a result, valuations have to be driven by earnings growth. Come drive,” she said.
Investors are leaving the market in large numbers. According to data provided to CBN reporters by the London Stock Exchange (LSEG), U.S. stock funds recorded a net outflow of $21.15 billion last week, the largest outflow since 2022, as investors worry that restrictive monetary policies will be extended while conflicts in the Middle East escalate. The biggest selling week since December. What is particularly noteworthy is that net sales of money market funds also reached $118.1 billion, which is another sign of cooling investor confidence.
The CME Group (CBOE) Volatility Index (VIX), which measures market volatility, rose nearly 15% in the past week and once exceeded the important psychological level of 20 during the session. Goldman Sachs warned last week that if U.S. stocks continue to fall and short-term trends reverse, hedge funds may sell $20 billion to $42 billion in U.S. stocks in the next month.
Charles Schwab wrote in its market outlook that U.S. stocks have experienced a difficult week, driven by geopolitical uncertainty and expectations for Federal Reserve policy. Meanwhile, the bond market is repositioning its prices as yields on the 2-, 5- and 10-year Treasuries recently climbed to five-month highs and a turning point appears to have been reached.
The agency believes that investors should continue to prepare for volatility given the underlying uncertainty. From a bullish perspective, there are recent signs of technical oversold conditions and there is already some evidence of panic selling. From a bearish perspective, U.S. bond yields and geopolitical risks have not been fully released, and investors will wait for the latest economic data and developments in the Middle East. The technology sector has been the driver of investor optimism this year, and the results of Tesla, Microsoft, Meta and Google will come under closer scrutiny in the coming week.