In the first quarter that just passed, U.S. stocks experienced their first quarterly decline since the epidemic amid the turmoil. The once-high volatility eased at the end of the quarter as the Federal Reserve started its interest rate hike cycle.
However, the turmoil in the U.S. bond market is attracting widespread attention. While the March non-farm payrolls report strengthens the outlook for economic health, it also reinforces expectations that the Federal Reserve will be more aggressive in raising interest rates to curb rising inflation.
However, an inverted key yield curve poses a recession risk as markets await a final decision from the Federal Open Market Committee (FOMC).
As U.S. stocks enter their best month in history, will monetary policy be a risk point for disrupting market performance?
Fed's aggressive rate hikes continue to warm up
As the most critical data in the United States last week, the latest non-farm payrolls report showed that the United States added 431,000 jobs in March, more than 400,000 jobs for 11 consecutive months, and the unemployment rate fell to 3.6%, only a short distance from the low point in February 2020. The difference is 0.1 percentage points, further meeting the full employment target set by the Federal Reserve.
Among the 25-54 age group, the labor force participation rate rose to 82.5%, the highest level in two years, and employment levels in most industries were above or close to pre-pandemic levels.
Overall U.S. employment remains 1.6 million below pre-pandemic levels.
As of the end of February, there were still 11.26 million job vacancies at Jolts in the United States.
In an extremely tight labor supply, hourly wages grew by 5.6%, well above pre-pandemic levels and the largest increase since 1980.
The risk of an inflationary spiral is rising against the backdrop of the U.S. consumer price index (CPI) approaching 8%.
Bob Schwartz, a senior economist at Oxford Economics, said in an interview with a reporter from China Business News that the U.S. labor market is still very hot, "It can be seen that the decline in the unemployment rate is driven by a small increase in the labor force participation rate. of".
He believes wage growth will help continue to attract job seekers to the market, while an increase in labor supply is crucial to easing current inflationary pressures.
At the same time, it will also help drive overall household income growth in the U.S., thereby maintaining a healthy pace of consumer spending.
On the other hand, the negative impact of price factors on the economy is also being released.
Consumer demand slowed sharply as the situation in Ukraine led to further supply disruptions and price pressures.
The ISM Manufacturing PMI fell to 57.1 in March, the lowest level since September 2020.
The drop in the data was caused by a collective pullback in new orders and production indices.
Timothy Fiore, chairman of the ISM Manufacturing Business Survey Committee, said in a statement that demand growth has slowed and consumption has softened due to tight supply chains and longer supplier lead times.
At the same time, the impact of the outbreak on the manufacturing sector is a potential headwind.
Price pressure regained momentum.
According to some respondents, the supply of raw materials is getting worse and worse, and some suppliers are starting to quote or accept orders.
While the recovery will gradually shift to services, the outlook for manufacturing remains fairly bright, Schwartz said.
“Healthy domestic demand will drive steady growth in manufacturing as consumer demand for goods remains healthy and business investment remains active. But supply shortages will weigh on manufacturing growth, and high prices may dampen spending intentions. Supply chain issues are expected in the short term. There will be no significant relief in the domestic market, and inflation has not peaked yet," he said.
The Fed is bracing itself for aggressive rate hikes, given the threat to the economy from an inflationary spiral of wage growth and supply chain bottlenecks driving downward pressure on upstream costs.
Several officials, including Fed Chairman Powell and Governor Waller, have expressed their views on the possibility of a 50 basis point rate hike in recent speeches, and the attitudes of many dovish members have also changed.
The latest remarks this week, including New York Fed President Williams and Fed Vice Chairman-designate Briand, are expected to further strengthen the outside world's expectations for monetary policy tightening.
FedWatch, the CME Group's interest rate watch tool, shows that the number of interest rate hikes is expected to be moving towards nine this year, which means that there may be two 50 basis point rate hikes.
Interest rate hike expectations are pushing up short-term U.S. bond yields while also pushing down long-term U.S. bonds, including 3-year/5-year, 2-year/10-year, and 5-year/30-year bonds. The yield curve closed inverted on Friday.
This phenomenon is widely seen as an important signal for the economic outlook, suggesting that a recession may be ahead.
The concern in the market is whether the Fed will eventually over-tighten, an outcome that historically has rarely been avoided by the Fed entering a rate hike cycle once unemployment has fallen to historically low levels.
Can the "Red April" Law of U.S. Stocks Come True?
Recession speculation sparked by an inverted U.S. yield curve last week didn’t hit markets.
The VIX, a measure of market volatility, has fallen back below the 20 mark as stock indexes move further away from their mid-March lows.
At present, more and more fund managers are betting that the stock market index has basically priced in the downside risk of the bond market, and there are many signs that the US economy is still in good health.
Some buy signals are also emerging: Bank of America's bull-bear indicator has greenlit for the first time since the outbreak of the coronavirus in March 2020, triggering a buy signal for stocks.
Entering the second quarter, U.S. stocks also ushered in the best month in history.
The S&P has risen 70% of the time, according to data from CFRA chief investment strategist Sam Stovall, which has averaged a 1.7% gain in April since World War II and was above the 0.7% average for the year. .
Meanwhile, with the S&P 500 out of correction territory last week, a short- to medium-term rebound is also worth looking forward to.
Since 1928, the S&P 500 has gained a median of 11.5% in a year after leaving correction territory, with a 77% chance of a rise, according to LPL Financial.
Of course, the historical data is for reference only, and the current market sentiment is still cautious.
U.S. money-market funds attracted $30.88 billion in inflows in the week ended March 30, as investors flocked to safer assets amid fears that the Federal Reserve's aggressive stance on inflation could be, according to financial data provider Refinitiv Lipper. impact the economy.
Value funds valued at $5.63 billion were cut in their biggest weekly net sell-off since mid-October, while growth funds also faced $557 million in redemptions.
According to data provided by Charles Schwab to the First Financial Reporter, the trading volume of US stock options last week was 41 million per day, which is at a historical high.
VIX call open interest increased by 5.8% month-on-month, short options increased by 11.3% month-on-month, S&P 500 call options increased by 3.8% month-on-month, and put options increased by 5.0% month-on-month. Investors are pessimistic about volatility and the index.
Concerns remain about an inverted yield curve, which has become a classic warning sign for many market participants.
Asset management firm Vontobel senior portfolio manager Colin (Ludovic Colin) bluntly said that the US stock market has not priced in any risk of the US economic slowdown.
"There's definitely a psychological element to it," said Gennadiy Goldberg, senior rates strategist at TD Securities in Canada. "The yield curve has worked in the past because it's always been a signal that the cycle is coming to an end."