The Federal Reserve revealed a heavy signal and was planning to start slowing down its balance sheet shrinkage "soon"! The Dow fell more than 400 points, and gold also "turned off"

Edited by: Bi Luming

Eastern time on Wednesday, the three major U.S. stock indexes fell collectively, as of the close, the Dow fell 1.09% (down 422.16 points), the Nasdaq fell 0.84%, and the S&P 500 fell 0.95%. On the data front, the US CPI rose 3.5% year-on-year in March before the market, higher than the market expectation of 3.4% and the highest level since September 2023.

In terms of other assets, Bitcoin fell below $68,000 to refresh its daily low after the CPI was announced, and then regained the 70,000 mark.

According to foreign media reports, the March inflation data was higher than expected, the Federal Reserve may postpone interest rate cuts, and the minutes of the Federal Reserve's March meeting reflected officials' concerns about achieving the 2% inflation target, and investor optimism was further dampened.

Fed officials believe that current interest rates are still well positioned to respond to changing economic conditions, such as the possibility that inflation will have to remain restrictive for longer, according to the minutes. Fed officials at the meeting believed that the balance sheet reduction was progressing well, and "nonetheless, given the experience of ending the 2017-2019 balance sheet reduction, there was a general consensus that caution was appropriate for further balance sheet reduction," the minutes wrote. Therefore, the vast majority of participants agreed that it would be prudent to start slowing down the pace of balance sheet reduction soon. ”

The target range for the federal funds rate is currently 5.25% to 5.5%, and the Fed has failed to act at five consecutive rate meetings since July last year.

According to the Chicago Mercantile Exchange Group's (CME) FedWatch tool, there is only a 17% chance that the Fed will cut rates at its June meeting. Traders are now betting that the first rate cut could be at the Fed meeting in September.

Most U.S. chip stocks fell, but Nvidia rebounded

U.S. big tech stocks were mixed, with Apple down 1.11%, Amazon up 0.15%, Netflix up 0.06%, Google down 0.29%, Facebook up 0.57%, and Microsoft down 0.71%.

U.S. bank stocks were lower across the board, with JPMorgan Chase down 0.92%, Goldman Sachs down 2.44%, Citigroup down 2.42%, Morgan Stanley down 2.59%, Bank of America down 2.86%, and Wells Fargo down 1.12%.

U.S. airline stocks were weak, with Boeing down 1.97%, American Airlines down 3.94%, Delta Air Lines down 2.27%, Southwest Airlines down 3.77%, and United Airlines down 2.46%.

Most U.S. chip stocks fell, NXP Semiconductors fell 4.27%, Intel fell 2.95%, Qualcomm fell 2.68%, Chaowei Semiconductor fell 2.13%, ASML fell 1.54%, Broadcom fell 0.88%, TSMC rose 0.56%, and Nvidia rose 1.97%.

The Nasdaq China Golden Dragon Index closed down 0.39%. Good Future rose more than 3%, Dingdong Food, Alibaba, and New Oriental rose more than 2%. Canadian Solar fell more than 7%, Daqo New Energy, Tiger Brokers, and EHang fell more than 4%, and Huya Live, Douyu, Atour, and Weilai fell more than 2%.

Most European stocks closed higher, with Germany's DAX up 0.11%, Britain's FTSE 100 up 0.33%, France's CAC 40 down 0.05%, and Euro Stoxx 50 up 0.2%. Reuters said that investors turned their attention to the ECB's monetary policy decision after the release of high inflation data in the United States.

International oil prices rose on the 10th. By the end of the day, light crude futures for May delivery on the New York Mercantile Exchange rose 98 cents, or 1.15 percent, to settle at $86.21 a barrel, and London Brent futures for June delivery rose $1.06, or 1.19 percent, to settle at $90.48 a barrel. Reuters analysis said that three sons of Hamas leaders were killed in Israeli airstrikes on the Gaza Strip, raising fears that ceasefire talks could reach an impasse.

In terms of precious metals, COMEX gold fell sharply after the release of U.S. inflation data for March, falling from $2,360 to $2,337.1 intraday, a drop of more than 1%. As of press time, COMEX gold edged up 0.17% at $2,352.6 an ounce. Some analysts believe that U.S. inflation exceeded expectations, U.S. Treasury yields rose, and the U.S. dollar climbed, restraining the rise of precious metals.

The U.S. dollar index rose sharply on the 10th. The dollar index, which measures the greenback against a basket of six major currencies, rose 1.05% on the day to settle at 105.245 at the end of the session. At the end of the New York market, the euro was worth $1.0736, down from $1.0853 in the previous session, and the pound was worth $1.2527, down from $1.2670 in the previous session.

The minutes of the Fed meeting revealed the signal of balance sheet reduction adjustment

On Wednesday (April 10), local time, the Federal Reserve released the minutes of the Federal Open Market Committee (FOMC) monetary policy meeting from March 19 to 20. Policymakers are concerned that inflation is not coming down fast enough and may need to remain tight for longer, though they still expect interest rate cuts sometime this year. The report also signaled a balance sheet adjustment, with officials leaning toward slowing the pace by half.

Fed officials believe that current interest rates are still well positioned to respond to changing economic conditions, such as the possibility that inflation will have to remain restrictive for longer, according to the minutes.

Officials believe that geopolitical turmoil and rising energy prices could still push inflation higher, and that accommodative policies could increase price pressures. The minutes of the March meeting also showed that almost all participants agreed that a rate cut sometime this year would be appropriate if the economy was broadly in line with expectations.

Fed officials also discussed the possibility of ending balance sheet reduction last month, according to the minutes. The Fed is winding down its holdings of Treasuries and mortgage-backed securities (MBS) at a rate of up to $95 billion per month, in a process known as quantitative tightening (QT).

While most officials believe the process is going well, they generally agree that caution is appropriate for further balance sheet reduction given the market turmoil in 2019. The minutes showed that Fed officials were generally in favor of cutting the monthly balance sheet reduction by about half, and they preferred to adjust the Treasury limit rather than MBS to slow the reduction.

According to foreign media reports, CPI increased by 3.5% year-on-year last month, higher than the 3.4% forecast by Dow Jones. The data weighed on stocks on Wednesday, pushing Treasury yields higher and prompting futures market traders to delay expectations for the Federal Reserve's first rate cut from June to September, based on CME Group's FedWatch tool.

Image source: Screenshot of CNBC report

Stephen Stanley, chief economist at Bank of America at Santander, said: "At the end of the day, they don't really care if they get to 2%, but the reality is that they can't achieve a sustained 2% inflation target without a critical cooling of service prices." And at the moment, we don't see any signs of that. ”

Since the beginning of the year, Wall Street has been closely watching the movement of the "super-core" inflation gauge. Ian Lingen, head of U.S. interest rate strategy at BMO Capital Markets, said the indicator rose after the January CPI data was enough to hinder the market's "perception that the Fed is winning the fight against inflation." "This will be an open question in the coming months," he added. ”

R· Tom Fitzpatrick, managing director of global market insights at J. O'Brien Associates, pointed out that another problem facing the Fed is the difference in the macroeconomic backdrop between demand-driven inflation and strong stimulus spending. These factors led consumers to increase their discretionary spending in 2021 and 2022, while also pushing inflation up to record highs.

He added that the situation is more complicated today because some of the most stubborn components of service inflation are household essentials such as car and home insurance and property taxes.

"They were horrified by what happened in 2021 and 2022, and we started from a different place this time," Fitzpatrick said. The problem is that if you take all of these factors together, these are not discretionary spending items, which puts the Fed in a dilemma. ”

Fitzpatrick noted that declining savings rates and higher borrowing costs make it more likely that the Fed will remain restrictive "until something goes wrong." He further added that this makes the background more complicated. He warned that it will be difficult for the Fed to bring down inflation by raising interest rates further because the current drivers are more stubborn and less sensitive to tightening monetary policy. Fitzpatrick said the recent rise in inflation is more similar to a tax increase. Although Stanley believes that the Fed is still far from raising rates further, it is still possible as long as inflation remains above the 2% target.

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