2024.0407

Number of words in this article:In 2022, the reading time will be approximately 4 minutes

introduction： 近一周恐慌指数VIX飙升超15%。

** Author| ** First Finance Fan Zhijing

After Fed officials made hawkish remarks and tensions in the Middle East caused oil prices to soar, U.S. stocks that had just entered the second quarter suffered a wave of selling, and the Cboe Volatility Index hit its highest intraday closing point since November 1 last year.
As investors worry about the Federal Reserve's ability to cut interest rates this year, the flow of funds shows that the U.S. stock economy is fleeing for the first time in nearly six weeks, and the sharp increase in money funds shows risk aversion. As earnings season and inflation reports approach, challenges may have just begun.

Loose expectations encounter setbacks

Although the U.S. service industry shows signs of cooling, the labor market is expected to bring continued impetus to the economy. After the ADP employment indicator hit a new high in mid-last year in March, the latest non-agricultural report far exceeded market expectations, adding more than 300,000 new jobs last month., the unemployment rate fell 0.1 percentage points month-on-month to 3.8%, continuing to show the health of the job market.
Bob Schwartz, senior economist at the Oxford Institute of Economics, said in an interview with First Financial News that the strength of the U.S. labor force gives the Fed reason to wait longer before cutting interest rates. Although there is a trend towards cutting rates this year, the strong job market and recent rising inflation are tying the hands of the Federal Open Market Committee (FOMC)."All in all, cutting rates requires further inflation slowdown."
The latest statement from Fed officials also made the prospects for a June turn no longer bright. Federal Reserve Chairman Powell said last week that economic activity was stronger than expected and did not change the Fed's broad expectation that lower inflation would allow interest rates to be cut this year. But he stressed that it was "too early" to judge whether the recent stronger-than-expected inflation was just a shock. Policy rates will not be lowered until confidence in inflation continues to fall to 2%.
In contrast, the hawkish remarks of many officials have attracted greater attention. Minneapolis Fed President Neil Kashikari hinted that if inflation progress stagnates, interest rates may not be needed this year. His views were also supported by Federal Reserve Governor Michelle Bowman, who spoke later.
Affected by a series of factors, U.S. government bond interest rates soared. Two-year U.S. bonds, which are closely related to interest rate expectations, rose 11 basis points to 4.73% weekly. Benchmark 10-year U.S. bonds approached the 4.40% mark, setting a new high since December last year. Federal funds rate futures show that the probability of a rate cut in June has dropped sharply from a high of nearly 80% in late March to below 60%.
Asset management giant PIMCO has lowered its forecast for the Federal Reserve to cut interest rates this year to two. Mike Cudzil, managing director and integrated portfolio manager at Pinhao, said U.S. economic activity is more resilient to high interest rates than many people predicted."In terms of direction, this means the Fed will act a little less, which is a good thing, and the economy is currently proving it can cope with higher interest rates."
Schwartz told First Financial that the possibility of postponing the first interest rate cut is rising. He believes that if the Fed does not cut interest rates in June, then the window may close until September, because there is little data between the June-July meetings to change the Fed's calculations. "Of course the Fed still has time." Schwartz emphasized that "most Fed members want to wait a while longer and not have to worry about the impact of past monetary policy tightening on the economy."

Market volatility or increase

Over the past week, a series of mixed economic data, weak service industry activity reports, stronger manufacturing reports and comments from policymakers have all put pressure on U.S. stocks, with the three major indexes plunging more than 1% intraday. At the same time, the panic index VIX, a measure of market volatility, once hit a high for the year during the session.
BMO Capital Markets attributed the market turmoil to a drastic change in policy expectations."More evidence of slowing inflation will be needed in the coming months to give the Fed the confidence to trigger its first interest rate cut this year."
Julian Emanuel, a strategist at Evercore ISI, believes that there is another phenomenon behind stock market volatility. Momentum stocks have lost their magic. Pressure on Nvidia's share price dragged down the S & P 500 index. He said historically, this dynamic is typical in April, and shifts from winners to laggards are common.
However, Emanuel believes that the challenges of 2024 may be unique because of the current importance of high-momentum stocks. "Although the Big Seven have become the Big Four, and the index weight of large-cap stocks is 25% to 30%, without the participation of these momentum stocks, the 'expansion' of the rally cannot be successful. Moreover, history in 2022 and 2008 suggests that when the energy industry leads as it is now, the broader market will also be in trouble. Maybe it's because higher energy prices are not good for other stocks." he said.
The flow of funds showed investors withdrawing from equity funds, marking the end of five consecutive weeks of net buying. According to data provided by the London Stock Exchange (LSEG) to the First Financial Reporter, U.S. stock funds suffered a net outflow of US$3.28 billion last week due to concerns about the prospect of the Federal Reserve's interest rate cut, of which large-cap stock funds sold to US$2.63 billion. At the same time, money market funds received huge buying orders of US$70.01 billion, setting a new high this year, showing a shift in risk appetite.
Schwab wrote in its market outlook that the stock market experienced some volatility last week, driven by economic data and the Federal Reserve's comments. "Perhaps the current interest rate of 5.25% to 5.50% is not as restrictive as the market believes, the U.S. economy can continue to maintain above-trend growth at current levels, and corporate earnings will also increase as the economy develops. If this is the case, easing may not be needed now." Market Outlook wrote.
The agency believes that judging from the late market trend, investors seem satisfied with the trade-off between reducing interest rate cuts and strengthening the U.S. economy. A strong economy is directly related to corporate earnings, and enhanced earnings growth prospects help justify higher valuations and higher stock prices. In any case, investors should be prepared for more potential volatility next year, with the consumer price index (CPI), producer price index (PPI), and next week in the earnings season as potential catalysts. For example, if the rise in oil prices in the past month appears in the headline data of CPI and PPI, what impact will it have? Can the performance of financial stocks bring greater confidence in the market? All in all, the recovery in the VIX index is a sign worthy of vigilance.

**