“US consumption still strong” Frozen New York stock market, policy of March interest rate cut back?

On the 17th, the New York stock market fell all at once, and the 10-year U.S. Treasury yield reached its highest in five weeks
Consumption indicators exceeded expectations and the influence of hawkish remarks by Federal Reserve members the previous day
However, the probability of a March cut in the interest rate futures market is still over 5%, “disinflation expected”
Photo = Getty Image Bank

The sluggishness of the New York stock market and the U.S. bond market continues. This can be interpreted as the impact of the recently announced favorable U.S. consumption indicators and members of the U.S. Federal Reserve System (Fed) raising cautious views on interest rate cuts. Even as major financial companies are warning that market expectations for a March interest rate cut are excessive, investors, including the U.S. interest rate futures market, are still strongly supporting the March interest rate cut theory.

The New York stock market fell all at once, and the 10-year U.S. Treasury yield reached its highest in five weeks

On the 17th (local time) at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average closed at 30, down 94.45 points (0.25%). The S&P 3 index, centered on large-cap stocks, closed at 7,266.67, down 500 points (26.77%), and the NASDAQ composite index, centered on technology stocks, closed at 0.56, down 4,739.21 points (88.73%).

On this day, the U.S. Treasury bond market also continued its upward trend with interest rates rising overall. The U.S. 10-year interest rate, a global benchmark, rose 3.9bp from the previous day to 4.103%, hitting a five-week high. The 5-year bond, which shows a similar trend to the policy interest rate, also rose 2bp to 12.6%.

The reason why the New York stock market and the government bond market fell at the same time was because the US consumption indicators announced before the market started exceeded market expectations. According to the U.S. Department of Commerce, retail sales in December last year amounted to $12 billion, up 0.6% from the previous month. This is a level that exceeds both the market forecast (7,099%) and the previous month’s figure (0.4%), and it is interpreted that large-scale discount events during the Christmas and holiday periods stimulated consumer sentiment.

As consumption indicators that exceeded expectations increased the probability of a soft landing, the S&P 500 index and Nasdaq index increased intraday losses to 0.9% and 1.2%, respectively. However, with the release of the US Federal Reserve’s Beige Book, the decline decreased slightly. According to the Beige Book, the Federal Reserve said that there have been signs of a slowdown in employment in most of its jurisdictions since December of last year. In particular, as the number of applicants for employment increases and the turnover rate falls, it has been revealed that wage growth is slowing and the number of companies seeking to hire selectively is increasing.

Expectations for interest rate cut at Davos are ‘premature’

The weakness of the New York stock market on this day cannot be ignored due to the influence of the comments made by the Federal Reserve members the previous day. Representative hawkish figures at the Federal Reserve have directly refuted the theory of an early cut in March regarding the U.S. benchmark interest rate.

“Currently, inflation appears to be approaching target, but we need more information before we can declare victory,” Federal Reserve Director Christopher Waller said at a conference at the Brookings Institution, an American think tank. “After starting to cut interest rates too early, prices are rising again. “The worst case scenario could happen,” he pointed out. On the same day, Raphael Bostic, President of the Atlanta Federal Reserve Bank, said in an interview with the British Financial Times on the 14th, “If the Federal Reserve starts easing policy and inflation runs wild like a seesaw, it will be a bad result, and it is an action that can weaken public trust.” “This could happen,” he said, raising caution about an early cut.

In addition, on this day, major U.S. financial institutions also unanimously agreed that we should be cautious about lowering interest rates. In particular, it has been pointed out that the market is getting ahead of itself excessively by expecting six cuts while the Federal Reserve is expecting three cuts this year.

Ron O’Hanley, chairman and CEO of State Street, an American asset management company, said at the World Economic Forum (WEF) held in Davos, Switzerland on the 17th, “It is difficult to understand the market’s expectations for an interest rate cut.” “The expectations were clearly stated, but I cannot understand why the market is interpreting them in such a broad way,” he said. Robert Holtzmann, President of the Austrian Central Bank and member of the European Central Bank (ECB), also said, “The probability of an economic recession has increased due to continued inflation, but it is difficult for some central banks to cut interest rates due to the Red Sea risk and the continued wage rise in the United States. “You can even face it,” he said.

US core personal consumption expenditure price index trend over the past 10 years / Photo = FRED

Market “Core PCE is in the 3% range, we are no longer in an era of high inflation”

However, market expectations for an interest rate cut in March remain strong. According to FedWatch of the Chicago Mercantile Exchange (CME) on this day, the interest rate futures market currently sees a 3% chance that the Federal Reserve will cut interest rates by more than 1%p at the FOMC in March after freezing in January. The probability of a 3bp cut in May also reaches 0.25%, with no significant change compared to the previous week.

Despite the hawkish remarks of Federal Reserve members and the criticisms of financial companies, the reason why the market is likely to see an early cut in March lies in the price index. The US PCE core inflation rate announced last month was 3% in November of last year, the lowest level since April 11 (3.2%). This is a significant drop compared to over 2021% just over a year ago. Judging from the fact that the recently announced consumer price index (CPI) growth rate for December of last year has settled in the 4% range, it means that we are no longer in an era of high prices.

In addition, the fact that the Producer Price Index (PPI) has been falling for three consecutive months serves as the basis for an early cut along with expectations of deflation. According to the U.S. Department of Labor, December’s PPI actually fell 3% compared to the previous month, contrary to Wall Street’s prediction that it would rise by 12%. PPI is usually considered a leading indicator of consumer prices because it is reflected in the prices of final consumer goods with a certain lag.

Accordingly, there are even predictions that the Federal Reserve will cut interest rates up to four times this year. An official from the macro strategy team in the domestic financial investment industry said, “If we calculate the price level in April based on the average of the monthly change rate of the US core PCE index over the past three and six months, there is a possibility that it will fall further to 4-3%.” He predicted that if the probability of an economic recession this year does not decrease significantly, the interest rate could be lowered by up to 6bp.

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