There are more and more signs that the risk of "stagflation" in the United States is overwhelming, and the market is completely frightened, and April may become a turning point for the market this year.
The US economic data released on the last day of April was really bad:
The quarter-on-quarter growth rate of the employment cost index (ECI) in the first quarter unexpectedly hit the largest record in a year, and the year-on-year increase in the Case Shiller home price index rose to the highest level since November 2022 in February.
Chicago's PMI fell sharply in April, but business costs rose significantly, the Conference Board's consumer confidence index fell to its lowest level in more than a year in April, and the Dallas Fed services income index plunged in April.
Overnight, U.S. stocks and bonds were killed, international crude oil continued to decline, and gold and bitcoin also continued to fall.
And looking back at the whole of April, the US macro economy was nothing short of a disaster: the US Citi economic surprise index plummeted to 7.6 from above 40 in early April.
As inflation returned, U.S. equities and bonds both turned around, reversing the strong momentum of the past six months.
The S&P 500 and Nasdaq both fell more than 4% in April, while the Dow fell 5%, its biggest monthly decline since September 2022.
Treasury yields have been moving higher, with 10-year and 2-year yields rising 48 basis points and 42 basis points, respectively, in April, with the latter already above the key psychological threshold of 5%.
The shares of the "Seven Sisters" closed down in April, the first decline since October last year.
In April, Chinese concept stocks significantly outperformed U.S. technology stocks, with the CSI Global China Internet Index rising 9.5% in April, and the Goldman Sachs TMT Megacap Tech Index falling 2%.
Gold and copper oil hit a high in the middle of the month and then rebounded across the board at the end of the month, with Bitcoin falling more than $10,000 in April, or 16%.
At the same time, the dollar returned strongly. The U.S. dollar index has risen for the fourth month in a row, rising sharply in the middle of the month.
Behind the rumors in the U.S. financial markets, the threat of stagflation is too serious to ignore. Given that economic growth was lower than expected and inflation was higher than expected across the board, Wall Street feared that a great stagflationary crisis comparable to that of the 1970s was on the horizon for the United States.
A repeat of the Great Stagflation of the 1970s? Will Powell be hawkish with the April interest rate decision imminent?
JPMorgan Chase CEO Jamie Dimon warned last week:
Yes, I think there is a chance that this (70s-style stagflation) will happen again. Now it looks like our situation is more like the 70s, and in 1972 the situation looked quite optimistic, but in 1973 the situation took a sharp turn for the worse.
The more notable event in April was the tightening of financial conditions. Although financial conditions have tightened only slightly, this tightening is what the Fed wants to see compared to the extremely accommodative conditions previously expected.
The Federal Reserve's May interest rate decision will be announced in the early hours of Thursday Beijing time, and the current consensus on Wall Street is that interest rates will remain unchanged this month, when the Fed's view of the recent inflation trend will become the biggest highlight of this decision.
Barclays expects that Powell will have to admit that the inflation data was disappointing at the press conference on the same day, and may withdraw his previous statement that policy is restrictive.
In a note released this week, Barclays' team of analysts Ajay Rajadhyaksha said that Powell's statement could be hawkish as the meeting will not provide new dot plots and economic projections. However, Powell is still expected to lower market expectations for direct rate hikes in the future.
Will April be a watershed year?
For investors, the question is, how long will the sell-off in US equities and bonds last?
According to Morgan Stanley's quantitative analysis, if the U.S. stock market continues to fall, the current systematic fund is expected to be forced to sell a large number of stock positions due to the extremely large long positions, resulting in a further decline in the stock market.
A recent JPMorgan survey also showed that the vast majority of respondents expect the VIX volatility index to rise sharply for the rest of the year, suggesting that investors are worried about more volatile and risky markets in the future.
At the same time, Barclays still has a negative view on bonds and risk assets, and the agency believes that risks are currently skewed to the downside in both fixed income and risk assets.
Risk assets rebounded last week, but we don't think that rally will be sustained. While the market was temporarily boosted by strong earnings from giant tech stocks last week, the overall volatility in the market remains intense.
Even after significant selling pressure, fixed income assets, such as bonds, remain exposed to downside risks. Market expectations for an economic slowdown may be overly pessimistic, and much of the selling pressure is due to rising interest rate expectations rather than an increase in risk premiums. Quantitative tightening will not provide a boost to the bond market as it did at the end of 2023, and auction sizes are likely to remain unchanged in 2024.
Risk assets are still too high at the moment and are not attractive as a hedge against long-term bond portfolios.
Barclays emphasised the importance of cash, which the agency believes is a relatively safe option in the current volatile market environment.
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