Last week's trend in U.S. stocks reflected a sharp change in market sentiment, the beginning of the week corporate earnings reports were positive to continue the index repair market, bottoming out the flow of funds, and the US Treasury yield fluctuations guided by the Fed's interest rate hike expectations then became the focus of the capital game, and the news about the situation in Ukraine in the last half of the trading day made the market continue to fluctuate, and the Fear Index (VIX), which measures volatility, once returned above 30.
In addition to the geopolitical factors of the Eastern European issue itself, the ensuing rise in energy prices could further exacerbate inflation risks, and fears of a tighter-than-expected Fed could bring more volatility pressure in the coming week.
The Fed faces heavy inflationary pressures
Despite expectations of a further rise in inflation, the US Consumer Price Index (CPI) shocked the market in January, and the month-on-month growth showed no signs of cooling. Strong consumer demand and pandemic-related supply constraints continue to push up prices, and U.S. inflation has remained above 5 percent for eight consecutive months. Among the sub-indicators, food prices soared by 7%, the largest increase since 1981, and used cars and rents became important drivers.
Bob Schwartz, senior economist at Oxford Economics, said in an interview with First Financial Reporter that high prices have put pressure on the Fed. As the worst of the Omiljung strain outbreak passes, the release of huge, suppressed demand could be a new round of price increase momentum. The main question for U.S. companies will be how to manage and restructure supply chains as they deal with logistics challenges, labor market tensions, and high production costs, but these strong headwinds are unlikely to abat significantly in the short term.
The rising price wave has a sustained negative impact on US household consumption. The University of Michigan Consumer Confidence Index fell back to 61.7 in January, the lowest reading since October 2011. It is important to note that the one-year inflation forecast rose to 5 percent from 4.9 percent in January, the highest level since July 2008, while the five-year inflation forecast remained stable at 3.1 percent. Richard Curtin, chief economist who led the survey, noted that nearly half of respondents expect real income to decline in the coming year.
Schwartz told first financial reporters that the tight job market has driven labor costs up, but it can be seen that despite rising incomes, wage growth rates are still lagging behind inflation to a considerable extent. Concerns about prices dragging down personal finances and future real income expectations, as well as the risk of a weaker economic growth outlook, are worth watching.
Recent bets on the Fed's higher-than-expected interest rate hikes are heating up. Goldman Sachs believes there will be seven rate hikes this year, and the Chiba Group Interest Rate Watch tool, FedWatch, shows that the probability of a 50 basis point rate hike in March once rose to more than 90 percent from 33 percent in the previous week and is now hovering around 50 percent. The first financial reporter noted that there was no consensus within the Fed on the 50 basis point rate hike in March. St. Louis Fed President Bullard, a hawkish commissioner and St. Louis Fed, said last week that he supported a cumulative 100 basis point rate hike by early July to counter the worst inflation in four decades, including the first 50 basis point hike since 2000. However, the three fed presidents, including Atlanta, Richmond and San Francisco, have chosen to downplay it, arguing that this is not the preferred solution.
Schwartz believes that the Fed's priority for now is undoubtedly to curb inflation, and the CPI data does reinforce the possibility of policy tightening, and then there is the possibility of raising interest rates at every subsequent meeting. Whether or not 50 basis points will emerge may be discussed, but its potential impact on the economy needs to be assessed. He currently expects the Fed to raise interest rates five times this year, accumulating 125 basis points, while the nodes in the balance sheet will be further advanced, possibly in May.
Agencies warn of volatility risks
The previous two weeks of U.S. stock rally attracted a large number of funds to buy on dips, and the performance of star stocks including Amazon, Disney, and GlaxoSmithKline boosted market confidence. According to Refinitiv Lipper, U.S. equity funds recorded a net purchase of $14.19 billion in the week ended Feb. 9, a new high for the year.
However, soaring inflation data has once again upset the market balance, driving the sector to rotate. The growth sector, which performed well at the beginning of the week, suffered a sell-off at the end of the week, and the information technology sector led the market. Since the beginning of this year, fed policy expectations have continued to dominate the direction of the market. Last week, the 10-year US Treasury yield broke through the 2% mark intraday, hitting a new high since 2019. Rising yields could negatively impact growth stocks, which are valued based on expectations of rapid growth in profits and cash flows in the future. As yields rise, a decline in the value of cash flows is squeezing valuations.
The cyclical value sector has become the safe haven choice for some funds, and industries such as energy, utilities, and consumer necessities have stood out. UBS believes that while the Fed's tightening is still likely to exceed expectations, while demand remains healthy, it advises investors to focus on winners of the future global recovery. Against the backdrop of rising interest rates, the value sector is expected to outperform the market.
However, the risk of short-term market volatility still requires investors to be vigilant. One of the bellwethers of investor sentiment, the Fear Index VIX broke through the 30 mark again after two weeks, rising nearly 18% last week. Gonzalo Asis, an analyst at Bank of America derivatives, mentioned in the report that there is a "torrent" beneath the appearance of the current market, and potential risks seem to be brewing as the liquidity of mini S&P 500 futures hovers at the low level since the epidemic. "The U.S. stock market is engaged in a tug-of-war between strong corporate performance and the most unfriendly Fed in decades, and this shock wave is directly reflected in intraday trends in stock indexes and individual stock price fluctuations." Archis wrote.
Terry Sandven, chief equity strategist at United Bank Wealth Management, believes that it is inevitable that the market will relapse into volatility, and "inflation tends to have a negative impact on valuations, and that's what we're currently experiencing." Until details such as the number and magnitude of fed rate hikes are clarified, the turmoil is likely to continue. He said.
Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, also advised investors in the study to slow down the pace of bottoming. After the U.S. stock correction at the beginning of the year, some investors showed great interest in bottoming out. While this has been effective for most of this economic cycle, it is too early for a full entry this time. "Every cycle is unique, and this is especially true of current policymakers dealing with the impact of COVID-19. The situation is complicated by historical market liquidity. The market is not yet ready for a final exit from the policy. ”