U.S. Federal Reserve (Fed) Chairman Jerome Powell warned the market at the beginning of this month that “it is too early to speculate when the rate cut will begin.” However, at the monetary policy press conference on Thursday, he said that “the issue of interest rate cuts has begun to be discussed.” Why Ball made a sudden turn in just two weeks is currently the most puzzling question on Wall Street.
Fed Chairman Jerome Powell suddenly switched gears in just two weeks. (Photo: ZeroHedge)
Even Wall Street Journal (WSJ) financial reporter Nick Timiraos, known as the “Fed’s mouthpiece,” didn’t understand. He posted on X (formerly Twitter) and lamented: “What happened in the past two weeks.”
Some on Wall Street believe that the recently released data, financial risks, real interest rates and other reasons cannot rationalize Ball’s “surrender” to the market. The most likely reason is the pressure from the US government, with Biden putting pressure on his support rate.
The December dot plot shows that the Fed predicts to cut interest rates by 75 basis points (50 basis points in September), 100 basis points (125 basis points in September), and 75 basis points (100 basis points in September) in 2024, 2025, and 2026 respectively. One interest rate cut in more than two years has brought forward the interest rate cut that was supposed to be carried out in 2025 to the “election year” of 2024.
Charlie McElligott, managing director of Nomura Securities’ Americas division, warned in a recent report that Ball’s “defensive turn” will have a huge impact on the macro economy.
Nomura believes that the Fed’s move is to promote a “soft landing” of the economy, reduce the negative impact of excessive tightening of policies before the inflation rate drops to 2%, and promote economic growth through a certain degree of stimulation. But heightened sentiment among market participants has led to financial conditions reaching the loosest levels during the Fed’s tightening policy period, which could trigger a new round of inflation.
Since Ball’s monetary policy press conference, financial conditions have reached their loosest levels since June last year. (Picture: ZeroHedge) Impact of economic data?
Wall Street first reviewed the official economic data released by the United States in the past 12 days and concluded that it had basically nothing to do with the data.
The main economic reports released by the United States during this period include: the November ISM service industry PMI index released on December 5, the November non-farm employment report released on December 8, and the December University of Michigan consumer confidence report, The November Consumer Price Index (CPI) report, released on December 12, even includes the retail sales data released this Thursday.
The US ISM services index in November was 52.7, better than economists’ expectations of 52.3, and was 51.8 in October. As business activity and employment picked up, the U.S. services sector picked up in November, expanding at a faster pace than in October.
(Picture: ZeroHedge)
Non-agricultural data in November exceeded expectations. There were 199,000 new non-agricultural jobs in November, far exceeding the previous figure of 150,000. The unemployment rate unexpectedly dropped to 3.7%, compared with 3.9% in October. Wage growth slightly exceeded expectations, and the average hourly wage Monthly growth was 0.4%, higher than October’s 0.2%, the highest growth rate this year.
(Photo: ZeroHedge)
On the same day as the non-farm payrolls release, the preliminary value of the University of Michigan’s consumer confidence index also rose to 69.4, much higher than November’s 61.3.
(Photo: ZeroHedge)
Finally, U.S. retail data released this Thursday showed that U.S. retail sales increased by 0.3% monthly in November, exceeding the previous value and market expectations of -0.1%. The growth rate once again turned from negative to positive, and retail sales exceeded expectations across the board.
Listing the important economic data released by the United States in the past 12 days, we can see that the stronger-than-expected and gradually improving trends seem unable to support the Fed’s sudden dovish turn.
Nick Timiraos believes that the Producer Price Index (PPI) data on Wednesday (a few hours before the interest rate decision is announced) may be one of the reasons for the Fed to change its decision. Some Federal Open Market Committee (FOMC) members changed their minds in the middle of the meeting. idea.
According to data released by the U.S. Department of Labor on Wednesday, the monthly growth rate of U.S. PPI in November was 0% and the annual growth rate was 0.9%, the lowest growth rate since June. However, some people believe that PPI is not the Fed’s preferred inflation indicator. Its favorite inflation measure-the core personal consumption expenditures (PCE) price index is still tenacious, which is untenable.
This has inevitably led to questions in the market: The Fed claims to rely on economic data to make decisions. Is this a “deceptive tactic” from beginning to end?
U.S. financial market risks?
Some people believe that Ball’s sudden turn may indicate some major risks in the US financial market, but they are blocked by the Fed and the market is unaware of them.
ING analysis believes that risks may exist in areas such as commercial real estate, rental markets or private credit that are overly sensitive to high interest rates. There are also speculations that they may be related to U.S. debt liquidity risks.
Since the beginning of this year, there has been an endless stream of negative news about the U.S. commercial real estate industry: many large properties have defaulted, building occupancy rates have declined, and rising interest rates have made refinancing difficult; while inflation and unemployment are suppressing demand in the rental market, while private credit markets have The expansion could lead to increased systemic risks, affecting the overall stability of the economy.
In its latest global economic risk report, Deutsche Bank believes that after two years of U.S. fiscal deficit pressure, the U.S. government debt ceiling crisis and regional banking turmoil, will there still be a large number of investors paying for the U.S. debt? This may be one of the major market risks Wall Street faces next.
US government factors?
After the above-mentioned possibility was ruled out, there was also a somewhat “conspiracy theory” speculation on Wall Street: the Fed’s rapid turnaround was related to pressure from the US government.
On October 3, US Treasury Secretary Yellen first expressed her views on the tightening of the Financial Conditions Index (FCI). She said that the continued rise in interest rates is not static.
Just before the December monetary policy meeting, Yellen’s latest statement said that the current decline in inflation means that while the Fed keeps nominal interest rates unchanged, real interest rates adjusted for inflation are rising. This seems to be the Fed’s Reasonable reasons for lowering interest rates in the future.
Yellen also believes that if the interest rate environment remains at a level “well above expectations”, the United States will face a more difficult task to control the deficit. Data from the U.S. Treasury show that as of the end of October, the weighted average interest rate on all outstanding debt was 3.05%, the highest level since 2010 and an increase of 87 basis points from the same period in 2022.
To cover the deficit, the U.S. government is likely to borrow more and more money, making the debt mountain even more difficult to overcome. As interest rates rise and the United States’ debt repayment burden becomes increasingly heavy, this may further aggravate the deficit problem and plunge the U.S. finance into a vicious cycle.
Therefore, media analysis pointed out that in the face of huge debts, Ball’s sudden turn will greatly help Yellen get out of trouble.
At the same time, media analysis pointed out that a latest poll released this week showed that Biden’s support rate is falling to a record low under the influence of many unfavorable factors such as high inflation in the United States. The Fed’s latest dot plot prediction is more about moving the interest rate cut that should have been carried out in 2025 to the “election year” of 2024. It is difficult to explain that this move has nothing to do with politics.
What is the impact on the market?
The analysis pointed out that the current market situation seems to be similar to a “quantitative easing/portfolio rebalancing” transaction to some extent.
Judging from the most intuitive market impact, U.S. debt continued to rise, with yields plunging for days and falling more than 10 basis points intraday.benchmarkTen-year U.S. Treasury yieldFalling below the 4.0% mark for the first time since August, the interest rate-sensitive two-year U.S. Treasury yield fell to 4.40% for the first time in half a year.
The market’s expectations for the Fed to cut interest rates significantly next year have further increased. At one time, it was estimated that interest rates would be cut by a total of 160 basis points next year, which is equivalent to at least six 1-digit (25 basis point) interest rate cuts.
The three major U.S. stock indexes collectively closed higher for six consecutive trading days. However, the gains of the three major U.S. stock indexes subsided during the session and all turned lower. Microsoft (MSFT-US) and many other blue-chip technology stocks fell back during the session. Analysts pointed out that the S&P is already at an overbought level, raising doubts about whether U.S. stocks have risen too far and face the risk of retracement.
Some market commentators pointed out that there is no guarantee that the stock market carnival will continue. When the market was betting on interest rate cuts in the past two years, it was caught off guard when the Fed failed to take action as scheduled. In the next few months, if there is an unexpected surprise in CPI or employment data, it may prompting traders to change direction. Therefore, some analysts believe that the future trend of U.S. stocks may rise rapidly and then fall rapidly.
At the same time, from the perspective of the US dollar, for most investors, betting on the weakening of the US dollar has become a very common strategy, and there are a large number of speculative “USD short” positions in the market, making the “short US dollar” transaction unusual. Crowded.
2023-12-15 13:19:54
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